Pakistan Foods & FMCG Sector If something is expensive, there is a reason The food and beverages sector in Pakistan has been considered a safe haven for institutional and HNW individuals for far too long. With its booming fundamentals and relative immunity to macro shocks, the sector has slowly and steadily paved its way up through the market. In this current year only, we have seen the sector rally exorbitantly on account of improvement in gross margins and volumetric growth amid pacy urbanization and growing middle income. Food Services Sector Performance 1M 3M 12M Absolute % 23% 35% 78% Relative to KSE % 14% 26% 27% Tuesday, December 17, 2013
With that kind of performance, the question that comes to mind is what should be the way forward. Is there some juice left in the consumer space or are the multiples too over‐
heated? We have tried to explain that in our report today. Overheated Multiples: Is that so? If we take a look at the PE multiples of the consumer sector, we see that the current multiples of almost all the companies are trading much higher than the companies’ historical multiples. We attribute such excitement to a number of compelling factors, the most notable of which include improvement in the sector’s gross margins that have increased in the range of 100‐500bps in addition to favorable socio‐dynamics (barring efoods) in FY13/CY13E. Current P/E ratio at a premium to historical multiples Relative Food Services vs KSE100 Index Company Food Producers
KSE100 Index
190
CY11/FY12 CY12/FY13 Current CY/FY14E CY/FY15E CY/FY16E Nestle 33.3 31.5 61.8 59.3 49.0 40.4 UPFL 14.6 23.2 63.3 28.0 23.4 19.8 170
SHEZ 3.9 10.6 14.4 59.9 49.8 41.5 150
MFFL 5 9.8 28.3 15.7 13.7 12.0 130
NATF 5.9 14.5 21.9 42.7 48.9 55.9 Source: BMA Research 110
90
Dec‐13
Nov‐13
Oct‐13
Sep‐13
Aug‐13
Jul‐13
Jun‐13
May‐13
Apr‐13
Mar‐13
Feb‐13
Jan‐13
Dec‐12
The multiples do look too heated for now but considering industry’s average 3 yr forward revenue and earnings CAGR of 12%and 20% respectively, that notion needs to be reviewed. We believe consumer stocks particularly food and beverages segment with strong business models and high earnings visibility have been justified in commanding a premium against other sectors. To note, an analysis of the performance of local stocks shows that food companies have provided superior returns despite trading at a premium all through the last two years. Food Companies’performance w.r.t KSE100 Performance Market UPFL Nestle Shezan Mitchells Zoya Ahmed National Foods CY11 ‐6% 35% 108% ‐5% 10% ‐9% CY12 49% 85% 18% 322% 370% 355% CY13TD 48% 147% 85% 72% 117% 85% Source: BMA Research
zoya.ahmed@bmacapital.com +92 111 262 111 Ext: 2056 BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.11
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Sector Fundamentals: too strong to be ignored Sector fundamentals Triggers to follow… …driven by Sustainable 3‐yr revenue CARG of 12% higher volumes and better prices Gross Margins to hover in the range of xx‐ commodity prices to remain soft moving forward Relative immunity to macro shocks inflationary pressures are easily passed on PKR devaluation Risks to look out for Major RM are local, benefit from export sales Market liquidity constraints Not much float available to trade Source: BMA Research Economics and demographics together at play in Pakistan The food and FMCG sector in Pakistan has all the ingredients needed for sustainable returns. Apart from the reasons mentioned in the table, Pakistan remains the sixth largest market in the world by consumer size with millions of consumers entering into independent disposable income space every year. In addition to this, the population is growing at a rate of 2% per annum where rate of migration to urban centres is even higher. Urban Population sets the growth trend for food sector Urban Population
60%
50%
40%
30%
20%
10%
Rate of urbanization
50.6%
38.0%
31.3%
2.7%
28.4%
3.0%
2.5%
2.9%
0%
Pakistan
India
Bangladesh
China
Source: BMA Research Sustainable GMs amid stable commodity prices Unlike 2013, most of the commodities used by the food and processing companies as raw materials are expected to witness a tight demand‐supply situation in CY14E‐CY15E as the demand is expected to outpace production slightly, according to FAO estimates. Having said, we do not expect prices to reach the highs seen in CY11 as supply additions in coming years would offset the consumption growth restricting the upside in cost pressures. Apart from stable raw material costs, the pricing mechanism of food companies is largely BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.22
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unregulated and companies find it easy to pass on price increments easily towards buyers. Thus, in light of soft commodity prices and relative ease of passing on cost pressure, we think it’s safe to assume no significant downward pressure on margins going forward. For our projections, we have taken constant margins conservatively for the next three years. Forecasted commodity prices in 2014E/15E Production (in Kt) Consumption Sugar 2014E 5,582 2015E 5,824 2014E 5,724 2015E 5,997 Wheat 24,669 25,068 24,774 25,206 4,244 4,300 4,300 4,360 Coarse Grain Source: FAO estimates Volumes to remain intact if not increase! Developing countries are expected to be the leading source of demand growth for food products. In Pakistan, higher consumption of food products is being driven by growing population and increasing concentration in large urban centres and mega cities, rising per capita incomes, expanding middle classes. The young and urban population, with high income propensity to consume is projected to continue to diversify their diets from basic staples and grains to higher protein foods, including meat and dairy products as their incomes and general affluence increase. Given such strong demand patterns, we expect robust growth in the companies’ revenues outlook despite inflationary pressures in the coming years. Industry revenues disregarding inflationary pressures PKR bn
Industry Revenues (LHS)
Inflation (RHS)
25%
160
140
20%
120
100
15%
80
10%
60
40
5%
20
‐
0%
2008
2009
2010
2011
2012
2013
2014E
2015E
Source: BMA Research Thus, we would like our investors to take a more holistic approach when it comes to investment in consumer space in Pakistan. Currently the market is at all time high levels and warrants a corrective phase. We believe, that correction mode will provide investors with an opportunity to build positions in the country’s fastest growing segment. Booming fundamentals enhances the possibility of further buybacks After the delisting of ULEVER in Jun13, the investors have started expecting more frequent buybacks of such MNCs. To recall, ULEVER was bought back by the parent company at PKR15,000/sh implying a PE multiple of 103x to CY13E earnings. Similarly, buyback of Lakson tobacco by Philip Morris at PKR666.89/sh in 2007 delegated a multiple of 87x. Buybacks reinforces the owner’s confidence into the sector’s growth dynamics in the long BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.33
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run and thus justify such expensive multiples. Hence, we believe the performance of consumer stocks cannot be plainly considered on the basis of PE multiples and any buyback prospects will act as a trigger and significantly help re‐rate the stocks. Institutional investors’ hot favorite With population growth of 2% per annum and ever increasing consumer spending, consumer stocks provide a direct means to leverage the country’s population and income growth story. This is evident in the shareholding structure of almost all the companies where institutional investors own a sizable portion of these companies. Market liquidity constraint: Hard to manage entry‐exit Shares available Company Shares mn FF Shares mn % Free Float 51.8 18.13 35% 45.35 2.27 5% SHEZ 7.26 3.15 43% MFFL 6.3 2.26 36% UPFL 6.16 0.09 1% NATF NESTLE Source: BMA Research The illiquidity issue hampers the trading attractiveness of these companies in a big way. On one hand it keeps individual investors’ interest at bay while on the other hand such lower quantity of shares freely available in the market increases the price volatility substantially. Given such a scenario, we advice investors to look at the sector as a pure long‐term play to earn hefty returns while avoiding short‐term trading. BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.44
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