InterMarket Perspective
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ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17 & 18
18 September 2017
Yusra Beg
+92-21-111-467-000 Ext: 305
• We initiate coverage on Engro Foods (EFOODS) with a Sell stance and a Dec’18 TP of PRs81/sh. EFOODS has achieved significant milestones in just over 10yrs of existence and it will continue to be a major player in Pakistan’s dairy sector, but an interim period of consolidation will keep profitability and thus share price in check, in our view.
• A temporary lull in the loose-to-packaged milk conversion cycle should not detract from exceptional LT prospects in a 200mn+ population, even as competition is now much tougher. An increasing pie size should dovetail with likely entry into powder e.g. GUMP under new sponsor Friesland Campina. Again, however, these are medium-term themes and ongoing challenges need attention before the company becomes aggressive again.
• We expect EFOODS to post EPS of PRs0.42 in CY17F, its worst performance since CY13. Coming from a low base, EFOODS is then projected to post 5yr Sales/Profit CAGRs of 19%/71%. On CY18F estimates, the stock trades at an acceptable P/S of 1.6x but very expensive P/E of 74.5x. The discrepancy between the two metrics is due to royalty & technical assistance fee being paid directly out of sales to the Sponsors.
Initiate with a Sell We initiate coverage on Engro Foods Ltd (EFOODS) with a Sell stance and Dec’18 TP of PRs81/sh. While long-term growth prospects in the backdrop of Pakistan’s 200mn+ population are immense, near-term outlook is beset by market share attrition, weaker margins and assorted challenges being faced by the industry. Royalty & technical fee arrangements do not help the bottom-line. EFOODS will eventually make a comeback, but it may not happen over the next 1-2 years.
Loose-to-packaged conversion has stalled for now Processed milk’s market share grew from an estimated 3% in 2001 to over 9% in CY12. However, the conversion cycle has since stalled and market share is c. 8.5% in 2016. This is a result of (i) removal of zero rating status for dairy sector, (ii) negative media portrayal amidst a tougher stance on quality & food labelling by regulators especially in Punjab, and (iii) a wider price gap versus loose milk. We do not see this derailing the long-term prospects for conversion (processed share projected to increase by c. 50bps pa over the next 10yrs); near-term, however, this lull adds to pressure on incumbents now facing heightened competition.
Peak market share may be gone for good EFOODS’ UHT market share is estimated to have fallen to less than 40% this year, sharply down from an estimated 49% in CY16, and the company’s sales are on track to decline for a 2nd year in a row. Major pressure was witnessed by both Tarang (tea whitener) and Olpers (UHT milk) with strategic missteps also adding to tougher operating conditions. We think EFOODS will now be able to maintain market share in existing products but peak market share of c. 50% appears to be gone for good, in our view.
Powder entry will come, but not immediately EFOODS is on the defensive, with focus on consolidating performance of the existing product suite. Until this is achieved, and it may take at least a year, the company is likely to keep ambitions of entering the powder segment on the backburner, in our view. Similar to ICI’s Morinaga, we build a powder trading business in our EFOODS’ model; GUMP from CY19 onwards and infant formula from CY21. Despite being a trading business, marketing costs associated with initial launch may delay breakeven on new products by 1-2years.
Valuations can only stretch so much 5yr sales / profit CAGRs are projected at 19% / 71% but valuations are still stretched. EFOODS trades at a CY18F P/E of 74.5x and even on CY19F this looks expensive at 49.5x (due to royalty & technical assistance fee, we think the P/S metric now has limited relevance for EFOODS). Our TP of PRs81/sh takes into account likely entry into the powder segment from CY19; without new additions to the product suite, our TP would be about PRs70.5/sh. Upside risk to our thesis can arise from introduction of minimum pasteurization law and stronger than expected performance of any new products.
Valuations can stretch up to a point; Initiate with a Sell
Engro Foods – Initiating Coverage
Engro Foods Limited
Price (PRs/sh) 99.6
TP (PRs/sh) 81.0
Stance Sell
Upside/downside -18.7%
Bloomberg / Reuters EFOODS PA / ENFL.KA
Mkt Cap (US$mn) 724.2
52wk Hi-Low (PRs/sh) 207.82/83.07
3m Avg. Daily Vol ('000 shrs) 524
3m Avg. Traded Val (US$mn) 0.57
EFOODS - Valuation Snapshot
Key Ratios CY16 CY17F CY18F CY19F
EPS (PkR) 3.11 0.42 1.34 2.01
EPS Growth (%) -25% -87% 220% 51%
PER (x) 31.98 n.m 74.52 49.47
P/S (x) 1.72 2.01 1.64 1.39
PBV (x) 4.45 4.39 4.12 3.79
Debt to Equity (%) 44.1% 123.6% 129.9% 110.9%
Source: IMS Research
EFOODS - Price Performance
1M 6M 12M FYTD CYTD
Absolute % (6.4) (42.5) (30.1) (18.0) (48.1)
Rel. Index % (3.9) (31.1) (36.5) (9.9) (37.6)
Abs. (PRs) (6.8) (73.7) (43.0) (21.9) (92.4)
Index Abs. (%) (2.5) (11.4) 6.4 (8.1) (10.5)
Source: IMS Research
2 | P a g e
Perspective
CY15/CY16 NPAT levels may take up to 5yrs time in re-emerging
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
CY1
7F
CY1
8F
CY1
9F
CY2
0F
CY2
1F
CY2
2F
PRsmn
Source: IMS Research
UHT Market share will take time to recover
0%
10%
20%
30%
40%
50%
60%
1Q
CY1
2
2Q
CY1
2
3Q
CY1
2
4Q
CY1
2
1Q
CY1
3
2Q
CY1
3
3Q
CY1
3
4Q
CY1
3
1Q
CY1
4
2Q
CY1
4
3Q
CY1
4
4Q
CY1
4
1Q
CY1
5
2Q
CY1
5
3Q
CY1
5
4Q
CY1
5
1Q
CY1
6
2Q
CY1
6
3Q
CY1
6
4Q
CY1
6
Source: Company Accounts & IMS Research
Sales should trough in CY17F
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
CY1
3
CY1
4
CY1
5
CY1
6
CY1
7F
CY1
8F
CY1
9F
CY2
0F
CY2
1F
CY2
2F
CY2
3F
CY2
4F
CY2
5F
CY2
6F
Existing brands (PRs mn) New Brands (PRs mn)
10yr Sales CAGR CAGR 16% (From CY16)
Source: IMS Research
Gross margins vs. Net margins trend
0%
5%
10%
15%
20%
25%
30%
0%
1%
2%
3%
4%
5%
6%
7%
8%
CY1
1
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
CY1
7E
CY
18
F
CY
19
F
CY
20
F
CY
21
F
CY
22
F
CY
23
F
CY
24
F
CY
25
F
CY
26
F
Net Margins (Lhs) Gross Margins
Source: Company accounts & IMS Research
Loose-to-packaged conversion trend
64%
34%
2%
CY0554%
42%
4%
Milk lost Traded Milk Processed Milk
CY16
Source: IMS Research
Valuation on P/S looks reasonable but inflated on P/E
1.00
1.25
1.50
1.75
2.00
2.25
-
50
100
150
200
250
300
CY17F CY18F CY19F CY20F
P/S (x) Rhs P/E (x)
Source: IMS Research
3 | P a g e
Perspective
Regional Valuation Comparison
Sym Company Name Orign
Market Cap
(USD) PER (x) ROE (%) P/S (x)
5YRs. Revenue CAGR
(%)*
ENFL.KA ENGRO Foods Limited Pakistan 724 74.52 5.5% 1.64 4.2%
600887.SS Inner Mongolia Yili Industrial Group Co Ltd China 22,490 20.15 24.5% 2.43 10.1%
2319.HK China Mengniu Dairy Co Ltd China 10,402 20.67 -3.6% 1.27 7.0%
VNM.HM Vietnam Dairy Products Jsc Vietnam 9,454 20.04 41.2% 3.56 16.7%
0151.HK Want Want China Holdings Ltd China 8,601 17.44 28.7% 2.85 0.1%
NESM.KL Nestle Malaysia Bhd Malaysia 4,741 21.71 98.4% 3.52 3.6%
600597.SS Bright Dairy And Food Co Ltd China 2,462 23.24 11.3% 0.80 11.4%
600429.SS Beijing Sanyuan Foods Co Ltd China 1,563 -- 2.2% 1.75 13.8%
HAPL.NS Hatsun Agro Product Ltd India 1,503 45.28 38.6% 2.29 21.2%
600300.SS V V Food & Beverage Co Ltd China 1,375 -- 2.6% 2.02 -3.6%
002329.SZ Royal Group Co Ltd china 1,190 13.88 10.6% 3.18 33.0%
1432.HK China Shengmu Organic Milk Ltd China 1,082 12.34 12.7% 2.04 54.8%
002770.SZ Henan Kedi Dairy Co Ltd china 942 37.84 5.8% 7.66 6.0%
1230.HK Yashili International Holdings Ltd China 935 126.69 -5.6% 2.78 -5.7%
DBMS.KL Dutch Lady Milk Industries Bhd Malaysia 898 24.65 90.1% 3.32 5.3%
600419.SS Xinjiang Tianrun Dairy Co Ltd China 779 31.54 10.6% 5.82 16.8%
002732.SZ Guangdong Yantang Dairy Co Ltd china 725 32.64 12.4% 4.31 10.5%
6863.HK China Huishan Dairy Holdings Company Ltd China 724 3.68 5.3% 1.05 64.7%
1717.HK Ausnutria Dairy Corp Ltd China 643 9.82 14.5% 1.53 15.2%
HEFI.NS Heritage Foods Ltd India 530 28.27 22.2% 1.79 6.3%
002719.SZ Maiquer Group Co Ltd china 517 36.39 2.5% 6.04 10.0%
KDAI.NS Kwality Ltd India 448 10.65 17.4% 0.42 23.3%
PAMF.NS Parag Milk Foods Ltd India 328 28.00 2.6% 1.22 14.0%
PRDA.NS Prabhat Dairy Ltd India 203 18.70 6.8% 0.92 23.9%
CNON.KL Can-One Bhd Malaysia 140 7.51 11.5% 2.26 8.0%
FAUJ.KA Fauji Foods Ltd Pakistan 129 -- -43.1% 5.86 -2.7%
CDC.AX China Dairy Corp Ltd Hong Kong 52 -- 22.2% 3.37 32.1%
LAMB.CM Kotmale Holdings Plc Sri Lanka 43 -- 21.6% 3.09 -4.8%
LMF.CM Lanka Milk Foods (Cwe) Plc Sri Lanka 37 -- 4.6% 1.07 -4.3%
UMDA.NS Umang Dairies Ltd India 24 -- 4.8% 0.74 6.9%
MLKF.BO Milk Food Ltd India 17 -- 5.0% 0.29 5.0%
RAFL.CM Renuka Agri Foods Plc Sri Lanka 10 -- 11.3% 0.62 -0.3%
MDRD.BO Modern Dairies Ltd India 4 -- 18.7% 0.06 -7.9%
*Last 5yrs reported Revenue CAGR. (For regional companies), EFOODs CAGR is from CY13 to CY18F
Source: Reuters, IMS Research
4 | P a g e
Perspective
Friesland Campina Based in the Netherlands, Friesland Campina is the sixth largest milk producer globally,
with over 11bn euros in revenues. The company produces and sells consumer products
such as dairy-based beverages, infant nutrition, cheese and desserts in Europe, Asia and
in Africa via its own subsidiaries. The Company is fully owned by Zuivelcoöperatie
FrieslandCampina U.A., which is a cooperative with +19,000 member dairy farmers in the
Netherlands, Germany and Belgium.
Acquisition of Engro Foods
Friesland Campina acquired 51% equity stake in EFOODS in Aug'16 at an inital price of
PRs120/sh ( Dec’16 Tender at a price of PR151.8/sh) i.e. ~US$450mn, together with a
recurring annual royalty/technical fee arising from EFOODS’ future sales. Specifically, FC
and ENGRO will also be entitled to technical assistance fee of 2.0% and 0.5% based on
EFOODS’ future net sales (net of taxes). FC will also receive a royalty fee of 2.0% (net of
taxes) of the future net sales of any products produced by EFOODS or FC and sold under
trademarks that are owned by FC. FC is expected to broaden the product portfolio in
segments like infant milk, growing up milk, etc.). Moreover, FC could also assist in
reviving EFOODS’ segments like juices and ice-cream in the long run.
Engro Foods Limited Headquartered in Karachi - Pakistan, Engro Foods was established in CY06 and has since
penetrated Pakistan’s UHT milk segment, including the specialized- Tea Creaming
segment (market share in UHT segment is ~40% and 28% in Ice Cream). EFOODS has a
network of 1,635 milk collection centres, which collect milk from about 150,000 farmers
on a daily basis. The milk, about 400mn litres (capacity 748mn litres), is processed in
plants located in Sahiwal and Sukkur. The company also runs its own dairy farm in Nara
that produces over 35,000 litres per day with a total herd size of 5,251 animals (2016).
Production & Capacity – Segment wise
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16
Dairy & Beverages
Capacity (mn litres) 127 321 376 447 446 601 657 730 748 748
Production (mn litres) 107 177 247 315 388 477 423 473 553 483
Utilization 85% 55% 66% 70% 87% 79% 64% 65% 74% 65%
Ice cream
Capacity (mn litres) - 10 10 19 36 36 39 39 39 39
Production(mn litres) - N/A 7 13 18 17 15 17 19 20
Utilization - 0% 67% 67% 50% 47% 37% 43% 50% 50%
Source: Company Accounts & IMS Research
TIMELINE
0
50
100
150
200
250
Au
g-1
1
Oct
-11
De
c-1
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Fe
b-1
2
Ap
r-1
2
Jun
-12
Au
g-1
2
Oct
-12
De
c-1
2
Fe
b-1
3
Ap
r-1
3
Jun
-13
Au
g-1
3
Oct
-13
De
c-1
3
Fe
b-1
4
Ap
r-1
4
Jun
-14
Au
g-1
4
Oct
-14
De
c-1
4
Fe
b-1
5
Ap
r-1
5
Jun
-15
Au
g-1
5
Oct
-15
De
c-1
5
Fe
b-1
6
Ap
r-1
6
Jun
-16
Au
g-1
6
Oct
-16
De
c-1
6
Fe
b-1
7
Ap
r-1
7
Jun
-17
Dairy Omung is
launched
Omore icecream gains
25% market share
Tarang
becomes UHT
market leader
First packaged
lassi launched
in Pakistan
Ecolean packaging
introduced for Olper’s Milk.
Olper’s becomes market leader
with 44% share in Premium UHT
milk category
Engro Foods powder production
facility in Sahiwal commences
operations
Omore achieves highest volume
of 19mn liters with 28% market
share.
Al Safa PRs881mn
loss writeoff drops
CY13 NPAT
EFOODS exits Al Safa, loss of
PRs600mn in CY14
SMP Prices collapse to
US$2000/MT
Friesland Campina
acquires Engro Foods
Buy back rumors
pull the stock price
UHT market share
drops to 49%, posts
Loss after tax in
4QCY16
Market share drops as
competition rises
Acquisition of
Al-Safa Halal
foods in Canada
Source: IMS Research
Subsidiary
Engro Foods currently
has two major segments
1) Dairy & Beverages
and 2) Ice-creams.
Tarang, Olpers and
Omung are major brands
in the dairy UHT
segment with Omore in
ice-creams.
Parent Company
Friesland Campina, a dairy
giant in Netherlands,
acquired 51% stake in Engro
Foods Pakistan, effectively
reducing ENGRO’s stake to
36%.
5 | P a g e
Perspective
Loose-to-packaged conversion has stalled for now Processed milk’s market share grew from an estimated 3% in 2001 to 9%+ in 2012.
However, the conversion cycle has since stalled and market share is c. 8.5% in 2016. This
is a result of (i) removal of zero rating status for dairy sector, (ii) negative media portrayal
amidst a tougher stance on quality & food labeling by regulators especially in Punjab, and
(iii) a wider price gap versus loose milk. We do not see this derailing the long-term
prospects for conversion (processed share projected to increase by c. 50bps pa over the
next 10yrs); in the near-term however, this lull adds to pressure on incumbents already
facing heightened competition.
Strong conversion rate until 2012 Pakistan’s processed milk industry witnessed strong growth in the mid-2000s, riding on
the coat-tails of higher rural incomes amidst heavy promotional activities by new players
in a market traditionally dominated by just Nestle’s Milk Pak. Processed segment’s
market share grew from an estimated 3% in 2001 to 9%+ in CY12 as income levels rose
and as awareness campaigns regarding adulterated milk - targeted towards the middle
income segment (~40% of population) - caused a shift towards healthier options. As a
result, EFOODS was able to commence business as late as 2005 and drive sales to
PRs49.8bn (US$475mn) by 2015, an exceptional 10yrs of growth that saw it overtake
NESTLE in the UHT segment which is a phenomenal achievement. This strong track
record together with appealing conversion prospects over the longer-term, also enabled
previous sponsors ENGRO to attract foreign companies looking to enter the Pakistan
market, which culminated in Friesland Campina acquiring a controlling stake in EFOODS
in late-CY16.
Last few years have been tough After peaking in CY12, the processed milk segment’s market share has steadily fallen to
an estimated c.8.5% in CY16 and we expect it to converge to 8% this year before
beginning to rise again. This subdued period is a function of multiple reasons such as:
• Removal of zero rating status for dairy sector: Up till FY16, Pakistan’s dairy sector
remained under the protection of zero rating regime with allowable tax refunds.
However, GoP recently not only discontinued this regime but imposed 25%
regulatory duty on skimmed milk powder where 20% customs duty was already in
place. GoP imposed 10% sales tax on concentrated powder milk, cream, yogurt,
cheese, butter, whey whilst UHT and Fat Filled milk remained exempt. In a tough
environment to pass on costs, this has led to reducing margins.
• Tougher stance on quality & food labeling by regulators: In late 2016, Sindh High
Court ordered an inquiry into adulteration of milk for several UHT milk producers.
Olpers was declared fit for consumption in Jan’17 however, this managed to damage
image of packaged UHT milk during that time. Moreover, rules on labelling of
packaged milk were tightened in Punjab whereby Punjab Food Authority declared
labelling of EFOODS’ dairy drink as misleading. The brand had to undergo rebranding
before continuing sales.
Pakistan- Milk Production and Dairy Sector Profile
Key variables FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
CAGR
2001-
16
Pakistan GDP (PRs tn) 4.5 4.8 5.3 6.1 7.0 8.2 9.2 10.6 13.2 14.9 18.3 20.0 22.5 25.4 27.7 29.6
GDP Growth (YoY) N/A N/A 4.7% 7.5% 9.0% 5.8% 5.5% 5.0% 0.4% 2.6% 3.6% 3.8% 3.7% 4.1% 4.1% 4.5%
Population (mn) 140.4 143.2 146.8 149.7 152.5 155.4 158.2 161.0 163.8 173.5 177.1 180.7 184.4 188.0 191.1 195.4 2.2%
World milk consumption (mn tonnes)* 589.1 604.7 615.9 629.5 648.7 667.5 685.8 699.2 708.3 723.1 742.2 762.3 765.1 789.1 802.8 816.0 2.2%
Pakistan milk consumption (mn tonnes)* 26.3 27.0 27.8 28.6 29.5 32.0 33.0 34.0 35.2 36.3 37.5 38.6 39.9 41.1 42.5 43.8 3.5%
Pakistan Buffalo herd (mn) 23.3 24.0 24.8 25.5 26.3 27.3 28.2 29.0 29.9 30.8 31.7 32.7 33.7 34.6 35.6 36.6 3.1%
FAO Dairy Price Index (2002-2004=100) 105.5 80.9 95.6 123.5 135.2 129.7 219.1 223.1 148.6 206.6 229.5 193.6 242.7 224.1 160.3 153.8 2.5%
Pakistan fresh milk prices (PRs/ltr) 18.2 17.9 18.4 19.2 21.3 23.9 26.7 30.5 36.6 42.3 50.1 58.2 65.2 69.9 76.2 78.2 10.2%
Int'l SMP prices (US$/MT)
N/A 3,176 2,951 3,534 4,230 2,498 1,887
*ECM- Energy corrected milk
Source: FAO STAT, Pakistan Economic Survey, SBP & IMS Research Source: FAO STAT, Pakistan Economic Survey, SBP & IMS Research
Processed milk is c. 8.5% of Pakistan’s
market vs. peak of 9.6% in CY12.
We expect processed milk share to
trough at about 8% in CY17F and
cross the 10% mark in CY22F
Pakistan’s annual milk production of
43.8mn ton (growing at 2%pa) is the
4th
largest in the world. Milk accounts
for 6% of Pakistan’s GDP
6 | P a g e
Perspective
• Wider price gap versus loose milk: With packaged UHT milk prices retailing at about
PRs.120-125/ltr the premium to loose milk (~PRs80/ltr) has widened to 56%, the
highest in 5yrs. This has stalled conversions from loose milk to packaged and has
built added pressure on volumetric growth for incumbent packaged market.
Conversion will keep happening over medium to longer run While some aforementioned factors have seen improvement, some issues remain
outstanding and may curb the loose-to-packaged conversion pace for now. Over the
longer run however, we believe continued conversion is inevitable due to factors such as
(i) rising GDP growth, (ii) higher per capita incomes – last reported at US$1,629 but
estimated at US$2,500 after informal economy is taken into account, (iii) rising
awareness of healthier options, (iv) gradual rise in urbanization and (v) greater scale
which may allow packaged milk prices to close the gap with loose milk prices. We
estimate that processed market share will grow by c. 50bps pa to cross 10% by CY22F
and reach 12%+ by CY26F.
Implementation of minimum pasteurization laws pitched to GoP Compared to several regional economies, Pakistan’s processed milk market share is
significantly low. This can potentially experience a growth spurt if Pakistan introduces a
minimum pasteurization la w. In this regard, we understand that EFOODS is also in talks
with the Government to introduce a minimum quality standard, which may immensely
help in clamping down on unadulterated milk and thereby prove to be a boon for the
packaged milk industry. This will face challenges however, and implementation is in no
way certain even over the medium-term. That said, it will have immense benefits for
companies like EFOODS.
The price differential vs. loose milk is quite high
0%
10%
20%
30%
40%
50%
60%
0
20
40
60
80
100
Jan
-12
Jul-
12
De
c-1
2
Jun
-13
No
v-1
3
May
-14
Oct
-14
Mar
-15
Sep
-15
Feb
-16
Au
g-1
6
Jan
-17
Jul-
17
PRS/Litre
Fresh Milk Prices - Lhs Discount to Olpers
Source: Economic Survey & IMS Research
Conversion going through a rough patch
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
CY
01
CY
02
CY
03
CY
04
CY
05
CY
06
CY
07
CY
08
CY
09
CY
10
CY
11
CY
12
CY
13
CY
14
CY
15
CY
16
CY
17
F
CY
18
F
Source: IMS Research
Pasteurization is intended to make
milk safer through a heating process,
albeit at a lower temperature than
for the UHT process
Processed milk has grown at a 15yr CAGR of 13% since FY01
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
CY0
1
CY0
2
CY0
3
CY0
4
CY0
5
CY0
6
CY0
7
CY0
8
CY0
9
CY1
0
CY1
1
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
mn litres
Milk Consumption Tradeable Milk Processed Milk
Source: Economic Survey & IMS Research
7 | P a g e
Perspective
Peak market share may be gone for good
EFOODS’ UHT market share is estimated to have fallen to less than 40% this year, sharply
down from an estimated 49% in CY16, and the company’s sales are on track to decline for
a 2nd
year in a row. Major pressure was witnessed by both Tarang (tea whitener) and
Olpers (UHT milk) with company missteps also adding to tougher operating conditions.
We think EFOODS will now be able to maintain market share in existing products but
peak market share of c. 50% appears to be gone for good, in our view.
Sharp market share loss in UHT segment In the UHT segment, EFOODS quickly filled out its market share to c. 50% as early as
2012, just within 7yrs of commencing operations. Considering the market was dominated
by Nestle’s Milk Pak brand, this is a significant achievement that cannot be taken lightly.
The two main products that enabled such rapid market share accretion for EFOODS are
Olpers (UHT milk) and Tarang (tea whitener) where we understand that these two brands
together contribute more than 85% of the company’s topline. For a number of reasons
however, EFOODS has been unable to maintain its market share which is estimated to
settle at less than 40% in CY17F, down from an average of 51% in the last 5yrs. These
reasons can be summarized as follows:
• Emergence of new competition: The untapped potential of Pakistan’s milk market
(43.8bn liters) has new players such as Fauji Foods (FFL) and Dalda (Cupshup).
Mapped onto our projections for sector demand, FFL management has implicitly
projected to gain approximately 15% UHT market share by CY22. This would require
other players (Olpers, MilkPak etc.) to potentially readjust their market shares or for
smaller players to become increasingly sidelined.
• High discounting from competitors: SMP is a key input used in the production of
tea whiteners. Therefore, recent drop in international skimmed milk powder prices
(down 49% since CY13), proved beneficial for local players, allowing room for price
discounts. Resultantly, heavy discounting from competitors weighed down on
Tarang in particular, resulting in loss of market share.
• Change in recipe mix: Channel checks suggest Tarang in particular faced consumer
backlash due to an ill-judged change in recipe to maximize profitability (not
confirmed by EFOODS management). While the issue has been resolved,
competitors took advantage of this gap where we understand peers such as Qudrat
and Haleeb have overtaken Tarang in Khyber Pakhtunkhwa.
• Improved quality of loose milk: Given rise in SMP imports by local industry players
(amid soft SMP prices), quantum of loose milk procurement by tea creamer
producers declined. This caused a drop in adulteration of loose milk due to higher
availability and resulted in improved quality for a certain period. This built pressure
on EFOODS’ UHT milk brand Olpers in the form of substitution.
Dairy competition products timeline
EFOODS UHT Market share trend
0%
10%
20%
30%
40%
50%
60%
CY1
1
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
Source: Company Accounts
CY81 CY87 CY90 CY99 CY03 CY06 CY12 CY15 CY16
Nestle MilkPak Haleeb Milk Nestle Everyday Candia Milk Tea MaxShakarganj-
Good Milk Day Fresh Dalda -Cupshup FFL- Nurpur Milk
SMP prices have bottomed out at c.US$2,000/MT
-
1,000
2,000
3,000
4,000
5,000
Jun
-10
Jun
-11
Jun
-12
Jun
-13
Jun
-14
Jun
-15
Jun
-16
Jun
-17
US$/mt
Source: Company Accounts
8 | P a g e
Perspective
In our view, some of EFOODS’ market share in the UHT segment is now gone for good.
Put differently, although some market share recovery may happen over the next few
years, achieving levels of c. 50% in UHT segment again now appears extremely difficult,
especially with the advent of new, aggressive competition. As such, we keep market
share of existing products at an average of 40% in our financial projections.
Tarang: On the comeback trail Pakistan’s consumption of tea whitener and creamers takes up approximately 32% of the
processed milk consumption (as per Tetra Pak in CY15) and is the fastest growing
category in Pakistan. As per channel checks, Pakistan consumes 72bn cups of tea
annually where tea whiteners, containing lesser quantity of milk solids, are a less costly
option as compared to all-purpose packaged milk.
Within this category, EFOODS’ tea whitener brand Tarang was the market leader during
CY14-15 (52% share as per Nielsen Retail Audit Report 2015). Tarang’s brand resonates
with Pakistan’s rural population and, out of EFOODS’ top 3 brands, Tarang is the main
revenue driver, contributing an estimated ~40% to the topline in CY16.
We understand that Tarang lost traction with consumers in 2HCY16 owing to variation in
recipe mix (as per channel checks) and swift entry of competition (e.g. Shakarganj Food’s
Qudrat brand) within that period, leading to loss in market share in rural segments
(especially Khyber Pakhtunkwa). EFOODS’ dairy market share thus dropped from 56% in
CY15 to 49% in CY16 and is projected to drop sharply to c. 40% in CY17F.
Recent drop in international skimmed milk powder (SMP) prices, a key ingredient in tea
whitener, also gave opportunity to discounters to eat into Tarang’s market. Tarang has
responded with price cuts as well (PRs5/ltr cut to PRs75/ltr); however growth within this
segment going forward would likely be more moderate in our view, compared with the
initial swift growth trajectory. Within tea creamers, Tarang competes with Haleeb’s Tea
Max with 25% market share (Dec’15) while remaining is taken up by Chaika, EveryDay,
Qudrat, Dostea and Cupshup in that order. That said, recent price competition
(aggressive discounting) may have moved certain players up the scale.
Olpers to maintain sales momentum…
Olpers falls under EFOODS’ UHT milk umbrella competing with both UHT and pasteurized
players alike. This category has historically been priced at a premium to fresh milk with
the premium last shrinking to just 24% in Sep’13. This was due to sudden shift in demand
for loose milk vs. UHT which forced UHT milk producers to reduce their prices. However,
the gap has widened significantly ever since to 56% - an all-time high.
Although Olpers has maintained its brand presence even while competition has risen, we
believe a tougher operating environment lies ahead as Fauji Foods expands its UHT milk
business under legacy brand Nurpur. Going forward, we believe shift in consumer
preference towards packaged milk should be gradual. We anticipate Pakistan’s processed
milk market to grow at a 10yr CAGR of 8.4% as awareness for packaged milk increases.
Price discount - fresh milk vs. Tarang (250ml)
-10%
0%
10%
20%
50
60
70
80
90
Jan
-12
Sep
-12
May
-13
Jan
-14
Oct
-14
Jun
-15
Feb
-16
Oct
-16
Jul-
17
Price/ Litre
Tarang prices - LhsDisc. To Fresh Milk Prices
Source: PBS, Economic Survey & IMS Research
Product Summary Tarang Olpers Omung
Dairy Market share: ~40% combined Market share in CY17
Category: Tea creamer All purpose UHT
milk Dairy drink
Target market: Lower middle class Upper middle class Lower middle class
Competition: Tea max, Chaika, Everyday, Qudrat,
Cupshup, Dostea
Milk Pak, Nurpur,
Day Fresh, Haleeb Loose milk
Region sold: Punjab, KPK, Sindh Punjab & Sindh Punjab
Highest by SKU: 200ML, 125ML, 250ML, 500ML 250ML, 1LTR,
1.5LTR 250ML, 1LTR
MRP per 250ML PRs.25 PRs.35 PRs.20
Contribution to sales (in volumes) 47% 38% 10%
Source: PBS, Economic Survey & IMS Research
9 | P a g e
Perspective
Sales contribution from Omung to rise gradually
Omung, envisaged as the direct competitor to loose milk (priced at a 5% dscount to loose
milk), remains in a sticky position even now as the company was recently fined of
PRs62mn through the Competition Commission of Pakistan for incorrect advertising of
Omung as alternate to loose milk, while it is infact merely a dairy drink. The company has
taken a court stay order in this regard.
Recall that Omung sales were initially barred in Punjab after the provincial food authority
stated that the product did not meet the classifications of the Punjab Pure Food Rules
2011. Specifically, in order to be categorized as milk, milk solids need to be in excess of
13.5%, while only 10% milk solids go into the production of Omung. Approval has now
been received from the Punjab Food Authority but Omung sales were affected in the
intervening period and will take time to regain traction particularly as price discount to
loose milk is now limited to about 5%.
Ice-cream segment to gain traction in the long run Pakistan’s Ice Cream consumption stands at approximately 90mn litres out of which
~80% is branded while remaining 20% is unbranded. Wall’s (Unilever) is the market
leader (60% market share in CY16) with Omore (EFOODS) the second largest player (30%
market share in CY16). The remaining 10% is catered by Gourmet, Igloo and Hico. Omore
sales have grown at a 7-yr CAGR of 16% across CY09-16, recovering after a period of
deceleration during CY13 owing to severe power crisis in the country. Although we
expect power shutdowns to drop significantly as fresh energy supply enters the grid in
2018, it would be hard to replicate the initial high growth witnessed from CY09 onwards.
Given recent drop in EFOODS’ dairy volumes, ice-cream dropped in tandem where
market share dropped to approximately ~28%. Going forward, we anticipate healthy
growth in volumes and recovery in market share, where we model in 7% (10-yr CAGR) for
the ice-cream market for the next ten years. Omore still has room to expand and gain
shelf space in smaller cities compared to Walls, which cements our view of some market
share expansion. The company continues to invest in its cold chain infrastructure, where
we have modeled in 35% market share for Omore by CY26.
Segment wise mkt share - D&B & Ice-cream
40%
44%
48%
52%
56%
60%
20%
23%
25%
28%
30%
1Q
CY1
2
2Q
CY1
2
3Q
CY1
2
4Q
CY1
2
1Q
CY1
3
2Q
CY1
3
3Q
CY1
3
4Q
CY1
3
1Q
CY1
4
2Q
CY1
4
3Q
CY1
4
4Q
CY1
4
1Q
CY1
5
2Q
CY1
5
3Q
CY1
5
4Q
CY1
5
1Q
CY1
6
2Q
CY1
6
3Q
CY1
6
4Q
CY1
6
Ice Cream and Frozen Desserts Dairy & Beverages - Rhs
Source: Company Accounts & IMS Research
Price discount - fresh milk vs. Olpers (1000ml)
0%
20%
40%
60%
0
20
40
60
80
100
Jan
-12
Jul-
12
De
c-1
2
Jun
-13
No
v-1
3
May
-14
Oc
t-1
4
Mar
-15
Sep
-15
Feb
-16
Au
g-1
6
Jan
-17
Jul-
17
PRS/Litre
Fresh Milk Prices - LhsDiscount to Olpers
Source: PBS, Economic Survey & IMS Research
10 | P a g e
Perspective
Powder entry will come, but not immediately EFOODS is on the defensive, with focus on consolidating performance of the existing product suite. Until this is achieved, and it may take at least a year, the company is likely to keep ambitions of entering the powder segment on the backburner. Similar to ICI’s Morinaga, we build a powder trading business in our EFOODS’ model; GUMP from CY19 onwards and infant formula from CY21. Despite being a trading business, marketing costs associated with initial launch may delay breakeven on new products by 1-2years.
Pakistan’s milk powder industry Since incorporation in 2006, the EFOODS has harbored plans to enter into Pakistan’s Growing-up-milk (GUMP) and infant milk powder market, and it may finally be in a position to do so under Friesland Campina. Pakistan’s milk powder industry stands at approximately 66,000MT (i.e. ~600mn litres) - a major chunk of which is imported - growing at a 5yr CAGR of 5%. Within this market, GUMP takes up a fair share, targeting toddlers and infants from stage-3 and onwards (12months-3yrs), where Nestle Pakistan leads with ~60%+ market share through legacy brand Nido. Infant formula, on the other hand, is a niche market catering to infants from birth to 12months (i.e. stages 1-3). Within this space, Nestle Pakistan again leads with ~30%+ market share followed by Meiji and Morinaga (ICI), making about 75% of the total market.
Brands similar to Friso & Dutch Lady may be introduced… Our talks with management suggest that Engro Foods may launch Growing-up-milk as its
first product in the milk powder category, followed by infant formula within
approximately 2yrs of the first launch. With change of hands in sponsor, EFOODS will
benefit from Friesland Campina’s vast experience in dairy, particularly GUMP and infant
powder through existing flagship brands: i) Friso (infant formula), ii) Dutch Lady
(Growing-up-milk); both in Malaysia, and iii) Peak in Nigeria (Growing-up-milk). FC’s dairy
brands in Malaysia hold a +60% market share which leads us to believe that similar
products would likely be introduced in Pakistan, but not immediately.
…but immediate focus lies on reviving existing business As per management guidance, EFOODS is expected to prioritize its existing products to
arrest decline in volumes – due to recent loss in UHT market share – and revive its Dairy
& Beverages segment. Therefore, we anticipate introduction of GUMP brands not earlier
than CY19, followed by infant formula in CY21, both via trading operations rather than
manufacturing inside Pakistan. Taking cues from Morinaga (ICI) – which has a similar
business model – we anticipate the company to enter initially into trading business for
these brands. We expect this initial plug-and-play to continue for a few years, where
EFOODS may potentially consider setting up manufacturing plant after the new brands
formally kick-off.
What is GUMP?
Growing-up milk is marketed as being
suitable for toddlers aged between one year
old and three years old. Growing-up milk has
vitamins, minerals and prebiotics added to
it. It also contains higher levels of iron than
other formula milks.
What is infant formula?
Infant formula is a manufactured food
designed and marketed for feeding to
babies and infants under 12 months of age,
usually prepared for bottle-feeding or cup-
feeding from powder or liquid.
Powdered Milk Categories Age Groups
Infant Formula 0-6months
Follow-up-formula 6-12months
Growing-up-milk 1-6yrs
Full-cream-milk 4-12yrs
Source: IMS Research
Friso is a Singaporean brand for infant milk powder under FC
Source: IMS Research
Dutch Lady is a Malaysian brand under FC umbrella
Source: IMS Research
11 | P a g e
Perspective
Go big or go home: EFOODS likely to aim for a large piece of the pie
Historically, EFOODS has tended to invest significantly on brand promotion for new
products in order to penetrate the market. Given that Pakistan’s milk powder industry is
about half that of ambient UHT – including higher number of participants, making it
harder to penetrate – we anticipate higher allocation of funds for initial promotional
campaigns. This would be in contrast to lack of major promotions for ICI’s Morinaga for
instance, where the latter is already an established brand in the Pakistani market.
As per management guidance, we expect EFOODS to incur one time marketing expense
close to PRs500mn per product launch, followed by sustained higher recurring
promotions. EFOODS has achieved high market shares in the past and in our view it will
likely be confident in achieving the same in the powder market as well. We build in up to
20% market share in both categories (GUMP & Infant Formula) by 2026.
Lucrative on margins but translation to the bottom-line may take time While UHT milk business has margins of approximately 20%, Pakistan’s milk powder
industry has far more to offer, in our view. Margins in the growing-up-milk category
average north of 30%, while infant formula trading business margins range between 55-
60%. That said, FrieslandCampina is entitled to Technical Assistance Fee of 2.0% on
EFOODS’ future net sales (net of GST) in addition to Royalty Fee of 2.0% on net sales (net
of sales taxes) of any new products produced by EFOODS, sold under trademarks that are
owned by FC.
Therefore, although we anticipate swift rise in market share to reflect directly in sales,
higher marketing & distribution expenses, coupled with payments to FC, will prohibit full
translation to the bottom-line.
We expect both products (GUMP an d infant formula) to post a loss of PRs0.41/sh and
PRs0.46/sh respectively in their first year (CY19 and CY21), and breakeven onwards as
market share gains momentum and marketing expense normalizes. By 2026, we expect
new products to contribute 21% to EFOODS’ overall topline and 11% to profitability.
EFOODS likely to compete against big players in the long run
Currently, Nestle remains the brand leader in the domestically produced infant formula
market through its products Nan and Lactogen, while Mead Johnson’s Meiji and ICI’s
brand Morinaga dominate the imported infant powder market. Nestle is also brand
leader in growing-up-milk formula market through Nido, which competes in both stage-3
infant formula market (vs. Meiji) and also the 1-3yrs growing-up-milk market. Given
EFOODS’ history of competing against Nestle in the dairy segment, the former may feel
confident in entering the powder segment opposite Nestle, particularly that it now has
FC backing, in our view. Although we anticipate the industry volumes to grow at a 9%
10yr CAGR, we expect shuffling in market shares to take place. Nutrico’s intention to set
up a manufacturing facility (commercial operations by FY18) cements the underlying
potential in the infant powder market.
Market share- Infant formula
Nestle Nido
FC EFOODS
Cow & Gate
BioMil
Meiji
Morinaga
Apatamil/ EnfaGrow
Progress Gold
CY16
CY26
Source: IMS Research
Market share- Growing-up-milk
Nestle
FC EFOODS
Meiji
Morinaga
Mead Johnson
Abbott
Cow & Gate
Nuzzer Pharma
Others
CY16
CY26
Source: IMS Research
Payments to sponsors
-
1,000
2,000
3,000
4,000
-
75
150
225
300
375
CY1
7F
CY1
8F
CY1
9F
CY2
0F
CY2
1F
CY2
2F
CY2
3F
CY2
4F
CY2
5F
CY2
6F
PRsmn(PRsmn)
Royalty Fee - Lhs Technical Fee
Source: Company Announcements and IMS Research
We expect EFOODS to enter the GUMP
market in 2019 and infant formula in 2021,
via a trading business
We build in c. 20% market share for both
product categories after 10yrs, after which
these new products will contribute 11% and
21% to EFOODS’ sales and profits,
respectively by CY26.
12 | P a g e
Perspective
Valuations can only stretch so much; Initiate with Sell
5yr sales / profit CAGRs are projected at 19%/71% but valuations are still stretched.
EFOODS trades at a CY18F P/E of 74.5x and even on CY19F this is an expensive 49.5x
(due to royalty & technical assistance fee, we think the P/S metric now has limited
relevance for EFOODS). Our TP of PRs81/sh takes into account likely entry into the
powder segment from CY19; without new additions to the product suite, our TP would
be about PRs70.5/sh. We thus initiate with a Sell stance. Risks emanate from a
continued tougher operating environment amidst aggressive competition. Upside risk
can arise from introduction of minimum pasteurization law and stronger than expected
performance of any new products.
Weak 1HCY17 sets the tone for full year results EFOODS reported 2QCY17 loss of PRs149mn (LPS: PRs0.19), bringing 1HCY17 profit to
PRs182mn (EPS: PRs0.24), down 91%YoY. Revenues lifted slightly from the 1QCY17
trough, but GMs dropped sharply to 15.6% (-4ppt QoQ; -11ppt YoY) owing to price
discounts offered to regain market share. Additional factors that contributed to 1HCY17
earnings drop were (i) continued decline in UHT market share (CY16: 49% vs. CY15: 56%)
with tepid growth in ice-cream segment volumes, and (ii) booking of 2.0% technical fee
expense to Friesland Campina. We expect 2HCY17 to depict an improvement compare to
2QCY17 but not by much.
EFOODS – 1HCY17 Result Review
(PRsmn) 1HCY17 1HCY16 YoY 2QCY17 2QCY16 YoY 1QCY17 QoQ
Sales 18,005 23,100 -22% 9,328 11,464 -19% 8,677 7%
COGS 14,879 16,723 -11% 7,876 8,395 -6% 7,003 12%
Gross Profit 3,125 6,377 -51% 1,452 3,069 -53% 1,674 -13%
Gross Margin 17.4% 27.6% 15.6% 26.8%
19.3%
Distribution expense 2,251 2,541 -11% 1,267 1,144 11% 984 29%
Admin Expense 408 423 -4% 177 232 -24% 231 -23%
Other opex 31 273 -89% 2 153 -99% 29 -94%
Other income 148 56 163% 100 0
48 111%
Operating Profit 583 3,197 -82% 109 1,540 -93% 474 -77%
Finance cost 222 214 4% 166 111 49% 56 194%
PBT 361 2,983 -88% (56) 1,429 -104% 418 -113%
Taxation 176 1,022 -83% 89 576 -85% 87 3%
PAT 186 1,961 -91% (145) 853 N/A 331 -144%
EPS (PRs) 0.24 2.56
(0.19) 1.11
0.43
Source: Company Announcement
Sales to resume growth but margin uplift to take time From its CY17F trough, we expect EFOODS to post a sales CAGR of 19% across the next
5yrs. Market share on existing product suite should rise, but only modestly given
competition in the UHT space has increased significantly. Margins are also likely to
recover from the 2QCY17 trough but only gradually. On existing products, we expect GMs
to average 19% over CY18F-20F vs. an average of 21% over CY14-16. However, after
incorporating likely entry into the higher margin powder segment over the medium-term,
our GMs for EFOODS are expected to consistently expand and reach 24% by CY26F.
Royalties and technical fee take away a significant chunk from EFOODS’ topline. Based on
our projections, EFOODS will end up paying as much as PRs21.8bn in these payments
across the next 10yrs. Were there no such paying arrangements, our EPS estimates for
EFOODS across the longer run would be 56% higher than current estimates. In such a
scenario, our TP for EFOODS would stand at PRs102/sh.
Quarterly revenue trend paints a weak picture
-1,500
-1,000
-500
0
500
1,000
1,500
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1Q
CY1
0
3Q
CY1
0
1Q
CY1
1
3Q
CY1
1
1Q
CY1
2
3Q
CY1
2
1Q
CY1
3
3Q
CY1
3
1Q
CY1
4
3Q
CY1
4
1Q
CY1
5
3Q
CY1
5
1Q
CY1
6
3Q
CY1
6
1Q
CY1
7
PRsmn PRsmn
Net Sales PAT
Source: Company Accounts & IMS Research
Had there been no royalty & technical fees,
our EPS estimates over the longer run would
be 56% higher than current estimates and
our TP would then stand at PRs102/sh
13 | P a g e
Perspective
Valuations may take time in catching up We intiate coverage on FrieslandCampina Engro Foods (EFOODS) with a Sell stance and
CY18F Target Price of PRs81/ share. We have valued the stock using a Discounted
Cashflow Valuation Model.
Valuation Methodology
We have valued EFOODS using Discounted Cashflow Methodology as we believe both
Price-to-Sales and PEG valuations would not correctly reflect the underlying risks of the
stock:
• Reasons for not using PEG/PE valuation: Taking CY17F as the base, PEG for the next
5yrs works out to 1.05x. Valuing EFOODS at PEG of 1 results in a TP of PRs94.3/sh for
EFOODS. However, we refrain from adopting the P/E valuation methodology due to
its arbitrary nature. Peer-based valuation is also difficult in this case given EFOODS’
unique dynamics and very low earnings base for CY17/18F.
• Reasons for not using Price to Sales valuation: Although we project 10yr sales CAGR
of 11% till CY26, translation to the bottomline would be gradual. This is due to the
impact of (i) hefty technical fee to FrieslandCampina & Engro Corporation, (ii)
payment of royalty to Friesland Campina amid weak fundamentals and (iii) initial-
launch marketing expense on new powder products. This makes P/S a less relevant
metric for valuing EFOODS, in our view, (valuing EFOODS at NESTLE’s CY18F P/S
multiple of 4.1x would result in a TP of PRs249.1/sh for EFOODS which does not
appear justified to us).
As such, we give preference to DCF where we have extended explicit forecasts to CY26 to
account for (i) potential consolidation of existing brands in the medium term and (ii)
formal take-off of new brands in the longer run. Therefore, NPAT is set to increase at a 3-
year CAGR of 101%% during CY17-19 and 9-year CAGR (CY17-26) of 39% respectively.
EFOODS- Valuation Snapshot
W/o new brands CY15 CY16 CY17F CY18F CY19F CY20F CY26F
EPS (PRs) 4.13 3.11 0.42 1.34 2.40 3.27 ………………….. 9.36
PER(x) 24.14 31.98 238.48 74.52 41.52 30.46 ………………….. 10.64
PS(x) 1.53 1.72 2.01 1.64 1.40 1.21 ………………….. 0.66
EBITDA Margin 14.4% 13.5% 7.2% 7.7% 8.7% 8.7% ………………….. 10.4%
Gross Margin 23.1% 22.6% 16.3% 17.7% 19.2% 19.7% ………………….. 22.4%
Net Margins 6.3% 5.4% 0.8% 2.2% 3.4% 4.0% ………………….. 6.2%
Incl. new brands
EPS (PRs) 4.13 3.11 0.42 1.34 2.01 3.38 ………………….. 11.52
PE(x) 24.14 31.98 238.48 74.52 49.47 29.44 ………………….. 8.65
PS(x) 1.53 1.72 2.01 1.64 1.39 1.18 ………………….. 0.59
EBITDA Margin 14.4% 13.5% 7.2% 7.7% 7.8% 8.7% ………………….. 11.3%
Gross Margin 23.1% 22.6% 16.3% 17.7% 19.4% 20.0% ………………….. 24.3%
Net Margins 6.3% 5.4% 0.8% 2.2% 2.8% 4.0% ………………….. 6.8%
Source: IMS Research
Risk Free Rate 6.0%
Beta 1.10
Terminal growth 5.0%
Risk Premium 8.0%
Cost of Equity 14.6%
Food Sector- Sector chart
-100%
0%
100%
200%
300%
400%
Au
g-1
1
Jan
-12
Jun
-12
No
v-1
2
Ap
r-1
3
Sep
-13
Feb
-14
Jul-
14
De
c-1
4
May
-15
Oct
-15
Mar
-16
Au
g-1
6
Jan
-17
Jun
-17
KSE100 Index IMS Food Universe Source: IMS Research
Scenario Based DCF Valuation Market Share Scenarios by CY26
Bull Case TP PRs90 *Existing Brands: 50%
EFOODS regains lost market share and significantly strengthens existing dairy
segment brand equity. New products gain swift success and customer acceptability
eating into Nestle and Nutrico market share by CY26. *New Products: 30%
Base Case TP PRs81
Existing Brands: 41% EFOODS increases promotional activity on Tarang, regains portion of lost dairy market
and maintains 41% share till CY26, while new brands penetrate with significant
advertising amid rising competition. New Products: 20%
Bear Case TP PRs66
Existing Brands: 30% EFOODS continues to lose market share as cannibalization by competitors increases
and loose milk conversions drop. New brands fail to gain significant traction despite
heavy marketing leading to 10% market share by CY26. New Products: 10%
*Existing brands: Tarang, Olpers, Omung; New brands: GUMP & infant formula Source: IMS Research
14 | P a g e
Perspective Key Risks Upside Risks
Upside risk factors include (i) Rise in processed milk market, (ii) Regaining market
share in existing products, (iii) Earlier than expected launch and success of powder
products and, (iv) any rumors of shares buyback by Sponsor FrieslandCampina.
Rise in processed milk market
Currently Pakistan’s processed milk market stands at approximately 8% of traded milk,
where we anticipate it to grow to 12.2% by CY26. Any increase in conversions over our
estimates remains key upside risk.
Regaining market share in existing products
EFOODS lost significant market share in CY16 (49%) where we anticipate market to pick
pace in the medium term and stabilize at 41% by CY26. Any increase in market share
through higher promotional activity would cause our TP to lift.
Earlier than expected launch and success of powder products
We anticipate EFOODS to enter the powder market through GUMP by CY19 and infant
formula by CY21. However, earlier than anticipated launch coupled with higher than
anticipated earnings in the respective brands remains upside risk.
Potential buyback by sponsor FC
Although the sponsor; Friesland Campina is not looking to delist Engro Foods at this
time (as per management rhetoric) however, any potential change in delisting plans
could increase stock price. The parent company and most of it subsidiaries worldwide
are not listed.
Downside Risks
Downside risk factors include (i) swift rise in skimmed milk powder prices (SMP), (ii)
swift rise in skimmed milk powder prices (SMP), (iii) rise in exchange rate and, (iv)
failure to enter the powder market in a timely manner
Significant dilution of market share through new entrants
EFOODS’ recent loss of market share opens up avenues for other players to cater the
remaining demand where we further share dilution becomes key downside risk. New
entrants such as Fauji Foods pose a major risk which is spending aggressively on milk
collection network and brand building.
Swift rise in skimmed milk powder prices (SMP)
Any increase in SMP prices would have a negative impact on gross margins where it
becomes non-viable for the company to rely heavily on imported SMP above
US$3200/MT, hence switching to locally procured liquid milk. That said SMP prices are
still at multi-year lows where chances of swift increase in prices amid international
oversupply seems slim.
Rise in exchange rate
Any upward fluctuation in the exchange rate poses downside risk as input costs would
rise and consequently dilute margins (if not passed through to the consumer). We cater
in 4% rupee depreciation in our model where any additional decline in value is a risk.
Failure to enter powder market in a timely manner
Any failure to enter the powder market in time would result in a drop in valuation given
lower discounting in the later years on our valuation.
15 | P a g e
Perspective EFOODS Company Graphs
SMP prices vs. Gross margins
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0%
5%
10%
15%
20%
25%
30%
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
CY1
7F
CY1
8F
CY1
9F
CY2
0F
SMP Prices (US$/MT) GMs (Lhs)
Source: Company Accounts & IMS Research
Revenue vs. NPAT (PRsmn)
-
500
1,000
1,500
2,000
2,500
3,000
3,500
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
CY1
7F
CY1
8F
CY1
9F
CY2
0F
Revenue NPAT - Rhs
Source: PAMA, Company Accounts & IMS Research
Segment-wise revenue breakup (PRsmn)
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
(500)
500
1,500
2,500
3,500
4,500
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
CY1
7F
CY1
8F
CY1
9F
CY2
0F
Dairy Farm (Lhs) Trading sales (Lhs)
Ice cream Dairy & Beverages
Source: Company Accounts & IMS Research
GUMP & Infant formula sales trend
-
2,000
4,000
6,000
8,000
10,000
12,000
CY1
9F
CY2
0F
CY2
1F
CY2
2F
CY2
3F
CY2
4F
CY2
5F
CY2
6F
(PRsmn)
Growing up milk Infant formula
Source: IMS Research
EFOODS UHT market share
0%
10%
20%
30%
40%
50%
60%
CY0
8
CY0
9
CY1
0
CY1
1
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
CY1
7F
CY1
8F
CY1
9F
CY2
0F
CY2
1F
CY2
2F
CY2
3F
CY2
4F
CY2
5F
CY2
6F
EFOODS UHT Market Share
Source: Company Accounts & IMS Research
Working capital trend (PRsmn)
(20,000)
(15,000)
(10,000)
(5,000)
-
5,000
10,000
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
CY1
7F
CY1
8F
CY1
9F
CY2
0F
Short-term borrowings Payables Receivables Inventory
Source: Bloomberg & IMS Research
16 | P a g e
Perspective
EFOODS - Valuation Summary
Profit & Loss Account
(PRsmn) CY15 CY16 CY17F CY18F CY19F CY20F
Net Revenue 49,834 44,346 38,053 46,646 55,037 64,948
Cost of sales 38,303 34,307 31,858 38,403 44,384 51,932
Gross profit 11,531 10,039 6,196 8,244 10,654 13,016
Admin & Selling Exp. 6,338 5,989 5,259 6,323 7,919 8,769
EBITDA 7,171 5,979 2,721 3,573 4,266 5,666
Dep & Amortization 1,977 1,930 1,785 1,652 1,531 1,419
EBIT 5,194 4,050 936 1,921 2,735 4,247
Financial Charges 856 348 583 605 614 500
Other income 326 149 295 301 307 313
Other charges 369 332 92 154 224 356
Profit before Tax 4,294 3,518 556 1,463 2,204 3,704
Taxation 1,132 1,131 236 439 661 1,111
Net Profit after Tax. 3,162 2,387 320 1,024 1,543 2,593
Balance Sheet
(PRsmn) CY15 CY16 CY17E CY18F CY19F CY20F
Non-Current Assets 15,230 14,246 13,255 12,480 11,786 11,177
Total Current Assets 11,055 10,467 25,651 30,075 30,674 31,882
Total Assets 26,285 24,714 38,906 42,555 42,460 43,058
Share capital 7,666 7,666 7,666 7,666 7,666 7,666
Reserves - - - - - -
Surplus on revaluation - - - - - -
Total Equity 14,913 17,151 17,404 18,512 20,137 22,827
Long Term Debt 2,196 500 1,833 5,333 4,000 3,333
Total Non current Liabilities 4,013 2,106 3,211 7,022 5,993 5,685
Short term Debt 7,360 5,457 18,291 17,021 16,330 14,546
Total Current Liabilities 7,360 5,457 18,291 17,021 16,330 14,546
Total Liabilities 11,373 7,563 21,503 24,043 22,323 20,231
Cash Flow Statement
(PRsmn) CY15E CY16 CY17E CY18F CY19F CY20F
CF from Operating Activities 4,768 5,126 6,568 2,215 4,951 3,111
CF from investing Actitivities (956) (1,097) (821) (839) (801) (766)
CF from Financing Activities (3,764) (3,591) 6,630 2,789 (2,556) (1,333)
Change in cash 48 438 12,377 4,164 1,594 1,011
cash at beginning 197 289 703 13,029 17,256 18,911
Cash at end of year 289 703 13,029 17,256 18,911 19,995
Source: IMS Research
Key Ratios CY15 CY16 CY17F CY18F CY19F CY20F
EPS (PkR) 4.13 3.11 0.42 1.34 2.01 3.38
EPS Growth (%) 256% -25% -87% 220% 51% 68%
PER (x) 24.14 31.98 n.m 74.52 49.47 29.44
P/S (x) 1.53 1.72 2.01 1.64 1.39 1.18
BVPS (PRs) 19.45 22.37 22.70 24.15 26.27 29.78
PBV (x) 5.12 4.45 4.39 4.12 3.79 3.34
DPS (PRs) - 10.00 - - - -
DY (%) 0.0% 10.0% 0.0% - - -
ROE (%) 21.2% 13.9% 1.8% 5.5% 7.7% 11.4%
ROA (%) 12.2% 9.4% 1.0% 2.5% 3.6% 6.1%
D/E (%) 76.3% 44.1% 123.6% 129.9% 110.9% 88.6%
EBITDA Margin 14.4% 13.5% 7.2% 7.7% 7.8% 8.7%
Gross Margin 23.1% 22.6% 16.3% 17.7% 19.4% 20.0%
Net Margins 6.3% 5.4% 0.8% 2.2% 2.8% 4.0%
EFOODs - PER (x) CY18F
-
100
200
300
400
500
Jan-12 Dec-12 Nov-13 Nov-14 Oct-15 Sep-16 Sep-17
(x)
PER (x)
Source: IMS Research
EFOODs - P/Sales (x) CY18F
-
1.0
2.0
3.0
4.0
5.0
Jan-12 Dec-12 Nov-13 Nov-14 Oct-15 Sep-16 Sep-17
(x)
P/Sales (x)
Source: IMS Research
17 | P a g e
Perspective
I, Yusra Beg, certify that the views expressed in the report reflect my personal views about the subject securities. I also certify
that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations made in this
report. I further certify that I do not have any beneficial holding of the specific securities that I have recommendations on in this
report.
Ratings Guide* Upside
Buy More than 15%
Neutral Between 0% - 15%
Sell Below 0%
*Based on 12 month horizon unless stated otherwise in the report. Upside is the percentage difference between the Target Price
and Market Price.
Valuation Methodology: We use Discounted Cash Flow (DCF) to value EFOODS as P/S and PEG would be misleading under current
company dynamics.
Risks: Please refer to page 14.
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18 | P a g e
Perspective
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