Inter

Market Pulse Research Entity Number – REP-085

19 October 2017

Pakistan consumers Yusra Beg

yusra.beg@imsecurities.com.pk
EFOODS: Expect another loss in 3Q +92-21-111-467-000 Ext: 305
• We expect EFOODS to post 3QCY17 Net Loss of PRs210mn (LPS: PRs0.27) vs. NPAT of
PRs633mn (EPS: PRs0.83) in SPLY. This will take 9MCY17 LPS to PRs0.04 compared to
EPS of PRs3.38 in 9MCY16. Drop in earnings will be due to (i) substantial drop in UHT
market share, (ii) price discounts on Tarang and (iii) seasonally lower margins in 3Q. Engro Foods Limited
• To recall, EFOODS sharply lost UHT market share during CY16 (49% from 56% in CY15) Price (PRs/sh) 82.80
particularly in the Tarang market, owing to tougher competition from Nestle, FFL and TP (PRs/sh) 81.00
Qudrat. Management expects marginal recovery in market share in CY18, but we think Stance Sell
this will come at the cost of lower margins due to price discounts (1HCY17 GMs: 17.6% Upside -2.17%
vs. 5yr avg: 21.7%) as focus shifts towards volumetric growth. Bloomberg / Reuters EFOODS PA / ENFL.KA
Mkt Cap (US$mn) 602.2
• EFOODS trades at CY17F P/S of 1.7x, at steep discount to listed dairy space (3.0x for 52wk Hi-Low (PRs/sh) 207.82/78.95
NESTLE and FFL), with a PEG of 0.58x. While this may seem attractive, translation to 3m Avg. Daily Vol ('000 shrs) 474
the bottom-line may take some time even with potential near-term recovery in sales. 3m Avg. Traded Val (US$mn) 0.46
We maintain our CY18 TP of PRs81/sh, which implies a Sell stance.
Expect an LPS of PRs0.27 for 3Q
Engro Foods (EFOODS) is expected to post 3QCY17 Net Loss of PRs210mn (LPS: PRs0.27) EFOODS - Price performance
compared to NPAT of PRs633mn (EPS: PRs0.83) in same period last year. This will take 1M 6M 12M FYTD CYTD
Absolute % (16) (44) (43) (32) (57)
9MCY17 loss to PRs28mn (LPS: PRs0.04) against a net profit of PRs2.6bn (EPS: PRs3.38) in
Rel. Index % (11) (31) (43) (19) (42)
9MCY16. We attribute the expected drop in profitability to (i) substantial decline in UHT Index Abs. (%) (5) (13) (1) (13) (15)
market share during 9M given rising competition in tea creamer market (Tarang brand), (ii) Source: IMS Research
resultant price discounts on Tarang during 9M to take back consumers in KPK/Punjab, and
(iii) seasonally lower 3Q GMs (14.0% vs. 15.6% in 2QCY17).
Historically, 3Q margins have been the lowest during the year (average sequential drop in EFOODS - 3QCY17 Result Preview
GMs over past 5yrs is 4.6ppt) potentially due to use of more powder than fresh milk amidst (PRsbn) 3Q17F YoY QoQ 9M17F YoY
lean supply and higher ice cream sales. This is in addition to (i) imposition of RD on Revenue 10.10 -8% 8% 28.24 -18%
imported SMP and (ii) 2% technical fee to be paid to parent company (Friesland Campina). COGS 8.69 -1% 10% 23.65 -8%
That said, recent incentives, via price discounts on distributor/ retail level, may allow Gross Profit 1.41 -37% -3% 4.59 -47%
D&M 1.25 19% -1% 3.56 -2%
sequential 8% jump in 3Q sales. Distribution and Admin expenses are expected to post
Admin. 0.19 -15% 8% 0.60 -8%
19%YoY jump while significant rise in ST finances (as at 2QCY17: PRs5.4bn vs. PRs65mn in Other income 0.11 254% 10% 0.26 195%
SPLY) will likely keep finance costs elevated during the quarter (PRs181mn, up 2.3xYoY). As Oper. profit 0.07 -93% -33% 0.65 -84%
in 2Q results, we anticipate EFOODS to book 1% turnover tax during the quarter. Fin. Charges 0.18 127% 9% 0.40 37%
PBT (0.11) -112% 83% 0.25 -94%
Margins may improve slightly in coming quarters
Taxation 0.10 -62% 13% 0.28 -79%
Looking ahead, recent drop in SMP prices, post 3QCY17 (down 10%MoM in Oct’17), will NPAT (0.21) -133% 42% (0.03) -101%
likely allow for higher margins in the coming quarters. That said, we do not foresee further EPS (PRs) (0.27) (0.04)
significant drop in SMP prices given tighter control on international inventory stockpiles. On Source: IMS Research
the local front, Punjab Food Authority is looking to ban sale of loose milk in the next 5-yrs
by establishing pasteurization plants in collaboration with the Punjab government. They
recently discarded 110,000 liters of adulterated milk through screening at various check
posts. While this could be a potential game changer for the dairy sector, implementation of
the same could prove difficult in initial years. Currently Pakistan’s processed milk market
stands at c.8% of the traded milk market with immense room for conversions still intact.
P/S looks cheap, but near-term prospects remain weak
EFOODS trades at a CY17F P/S of 1.7x at steep discount to the listed dairy space (average
P/S for NESTLE, FFL is 3.0x); PEG is at 0.58x. While these valuations may seem attractive,
recovery in sales and translation to the bottom-line may take some time. We maintain our
CY18 TP of PRs81/sh which implies a Sell stance.

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 3 & 4

To find our Research on Bloomberg, please type - IMKP <GO> www.jamapunji.pk
 Market
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KSE100 Index & Volume Earnings yield vs. T-bill spread

1,000 5.5%
52,000
5.0%
750 4.5%
46,000
4.0%
40,000 500
3.5%
250 3.0%
34,000
2.5%
28,000 - 2.0%

Dec-16

Jun-17
Oct-16
Nov-16

Jul-17

Oct-17
Apr-17
Sep-16

Feb-17
Mar-17

Sep-17
Jan-17

May-17

Aug-17
Dec-16

Jun-17
Oct-16
Nov-16

Apr-17

Jul-17
Sep-16
Sep-16

Feb-17
Mar-17
Mar-17

Sep-17
Jan-17

Aug-17
Aug-17
May-17

Vol. shares (mn) - Rhs KSE100 Index pts. Earnings Yields - 12m Tbills Spread
Source: PSX Source: Bloomberg, IMS Research

Sectorwise FIPI Flows (US$mn) Portfolio Flows

Sectors 18-Oct-17 MTD CYTD FYTD (US$mn) Current WTD* MTD 12M CYTD FYTD
Others 0.5 22.7 (107.4) 3.8
Total FIPI (0.09) 25.5 31.4 (640.0) (391.5) (58.7)
Cement (0.1) 0.2 (155.4) (19.0)
Banks (0.3) 2.5 (49.3) (10.7) Individuals (0.87) (6.2) (4.4) (35.2) (63.6) 12.7
Fertilizer (0.1) 2.9 0.2 16.3 Companies (0.43) (1.5) 1.1 121.6 85.1 20.3
Food 0.0 0.2 2.9 10.3
Banks / Dfi 0.41 2.1 18.6 (57.1) (21.0) 52.2
E&P 0.1 (3.5) (40.0) (44.8)
OMCs 0.2 3.5 21.7 (5.4) NBFC (0.19) (2.2) (6.6) 62.3 9.4 (8.0)
Power 0.0 2.7 (51.2) (7.8) Mutual Funds (2.05) (22.8) (27.3) 422.6 203.1 (64.9)
Telecom (0.3) 0.4 (0.4) (1.3)
Other Organization (0.06) 2.8 11.5 (6.6) 20.4 19.3
Textile (0.1) (0.1) (12.7) 0.1
Total (0.09) 31.42 (391.53) (58.67) Broker Trading 0.40 0.1 (15.0) (11.2) 14.5 (12.9)
Source: NCCPL Source: NCCPL
*Last 5 working days
World Indices Commodity Prices
Close DoD Δ DoD Δ (%) CYTD Δ (%) FYTD Δ (%) Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%)
Pakistan 40,733.5 8.5 0.02% -14.80% -12.52% Gold - US$/oz 1,280.78 -4.36 -0.3% 1.5% 11.2% 3.2%
China 3,381.8 9.8 0.29% 8.96% 5.93% Oil- US$/bbl 51.99 0.02 0.0% 3.4% -3.2% 12.9%
Hong Kong 28,711.8 14.3 0.05% 30.50% 11.44%
Cotton US₵/lb 67.83 0.06 0.1% -4.7% -4.0% -1.1%
India 32,584.4 -24.8 -0.08% 22.38% 5.38%
Coal - US$/MT 92.00 0.00 0.0% 8.8% 11.0% 18.1%
Indonesia 5,929.2 -18.1 -0.30% -12.10% 1.71%
CRY Index 183.99 -0.24 -0.1% -3.6% -4.4% 5.3%
Malaysia 1,749.0 0.0 0.00% 6.53% -0.83%
Source: Bloomberg
Japan 21,363.1 26.9 0.13% 11.76% 6.64%
Singapore 3,329.0 0.0 0.00% 15.56% 3.18% Forex & Money Market
Korea 2,482.9 -1.5 -0.06% 22.52% 3.81% Close DoD Δ YoY Δ bps CYTD Δ bps FYTD Δ bps
Taiwan 10,720.3 -2.9 -0.03% 15.85% 3.13%
6m Tbill yield (%) 6.00 0.0 7.5% -1.0% -1.0%
Bangladesh 6,025.3 -6.5 -0.11% 19.64% 6.53%
10Y PIB yield (%) 8.23 0.0 31.5% -29.5% 0.0%
Sri lanka 6,572.1 0.0 0.00% 5.52% -2.59%
6m Kibor (%) 6.15 (0.0) 12.0% 3.0% 1.0%
Philippines 8,431.7 -66.0 -0.78% 23.26% 7.50%
Thailand 1,707.5 -16.9 -0.98% 11.87% 8.43%
Vietnam 827.7 -0.6 -0.07% 24.49% 6.60% Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%)
USA 2,561.3 1.9 0.07% 14.40% 5.69% PkR/US$ 105.41 -0.01 0.00% 0.6% 0.8% 0.5%
UK 7,542.9 26.7 0.36% 5.60% 3.15% PkR/EUR 123.67 -0.36 -0.29% 7.2% 11.8% 3.4%
Germany 13,043.0 48.0 0.37% 13.60% 5.82% PkR/JPY 0.936 0.00 -0.48% -7.1% 4.5% -0.1%
Source: Bloomberg Source: Bloomberg
Market
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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 multiple valuation methodologies in arriving at a Target Price including, but not
limited to, Discounted Cash Flow (DCF), Dividend Discount Model (DDM) and relative multiples based valuations.

Upside risks: (i) regaining market share in existing product suite, (ii) earlier than expected launch of powder products
and (iii) rise in processed milk market

Downside Risks: (i) Significant dilution of market share through new entrants, (ii) Swift rise in skimmed milk powder
prices (SMP), (iii) Rise in exchange rate, and (iv) Failure to enter powder market in a timely manner

Disclaimer: Intermarket Securities Limited has produced this report for private circulation only. The information,
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Market
Pulse

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