Friday, April 06, 2012

Pakistan Research

Company Report Food Producers

EFOODS - BUY TP Dec-12: PKR 57 Current Price: PKR 48
Farid Aliani farid@bmacapital.com

EFOODS: ALL THE INGREDIENTS FOR SUSTAINABLE RETURNS!

INVESTMENT SUMMARY

Sustainable Long Term Growth Prospects: EFOODS presents considerable long term growth prospects based on 1) rapid expansion into non cyclical high growth markets 2) triumphant penetration and market growth in key segments of operation and 3) successful establishment of high value brands. We project earnings to grow at a CAGR of 49% and revenue growth at a CAGR of 21% for the next five years, making EFOODS one of the best consumer plays in the Pakistani market Massive Untapped Potential: The companys advantage stems from its dominant position in high growth non cyclical UHT milk market, which has shown double digit market growth in last five years and still represents a minute 4% portion of total tradable milk in Pakistan, presenting massive untapped potential going forward. EFOODS has successfully tapped a diverse range of income groups with its innovative product offerings and marketing, creating unmatched brand equity for its entire dairy portfolio. Aggressive Expansion to Fuel Growth: EFOODS has ambitious expansion plans for the coming years, with the company having already announced a PKR8.7bn capex for CY12. We believe aggressive spending to build capacity and expanding distribution network will continue going forward, making EFOODS a Hundred Billion Turnover company within the next ten years Attractive Valuations: Our multiple valuation approaches of Discounted Cash Flows and comparison of relative multiples with local and regional FMCG players lead to our Dec12 Target Price of PKR57/sh for the company, presenting a 19% upside from current levels .

Bloomberg Current Price Market Cap EFOODS PA PKR 47.84/sh PKR 35,966 mn USD 400 mn Free Float Shares O/S mn 32 weeks High-Low 10% 752 50.58/ 21.80

Price and Volume Graph

Volume mn(RHS)
60 50 40 30 20 10 ov-11 Mar-12 Oct-11 ep-11 an-12 eb-12 Apr-12 ug-11 ec-11

Price PKR(LHS)
7 6 5 4 3 2 1 -

Financials
PKR mn Revenues CY11A 29,859 6,629 2,412 1,363 891 1.19 22% 43% CY12E 37,901 8,779 3,366 2,094 1,361 1.81 23% 27% FY13E 46,183 11,097 4,578 2,445 1,589 2.11 24% 22% FY14E 55,880 14,235 6,772 4,484 2,915 3.88 25% 21% FY15E 66,168 17,522 9,023 6,695 4,351 5.79 26% 18%

EFOODS vs KSE100 Relative Index Chart

KSE100 Index
240 200 160 120 80 40 Nov-11 Mar-12 Oct-11 Jan-12 Aug-11 Sep-11 Dec-11 Feb-12 Apr-12

Gross Profit Operating Profit PBT PAT EPS Gross Margins Revenue Growth Source: BMA Research

EFOODS

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.

Friday, April 06, 2012

TABLE OF CONTENTS 1 2 3 4 5 6 7
EFOODS: Ingredients for sustainable returns Dairy Market: Milking the profits Juices: Lots to squeeze Ice Cream: Icing on the cake Nara Farm & Al Safa: Completing the growth story Expansion: Leading to a hundred billion Valuations: 19% upside available 3 3 4 5 6

6 6

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.

Friday, April 06, 2012

EFOODS: Has all the ingredients for sustainable returns

We have revisited our models for Engro Foods (EFOODS) in light of the latest financials and our updated Dec12 Target Price for the company stands at PKR57/share, representing 19% upside from current levels. The stock has considerable long term growth prospects based on 1) rapid expansion into non cyclical high growth markets 2) triumphant penetration and market growth in key segments of operation and 3) successful establishment of high value brands. EFOODS primarily operates in Dairy, Juices and Ice Cream markets, besides having its own farm of over 3,000 animals. The company also manages halal foods business in North America namely Al-Safa, currently owned by Engro Corp. (ENGRO); the parent company of EFOODS.

Dairy Market: Milking the profits

UHT milk market at estimated 860mn liters still represents only ~4% of total tradable milk in Pakistan. EFOODS has so far demonstrated immense success in tapping this segment, evident from it attaining 44% market share by the end of CY11, making it the leader of this segment. The companys biggest brand Tarang is the highest sold tea whitener in Pakistan whereas the flagship brand Olpers has made itself preferred choice of high end consumers. EFOODS with all its dairy brands has made inroads into over 300 towns in the country. We believe that the UHT market will continue to grow in the range of 7%-11% per annum going forward. We have taken EFOODS market share in UHT segment at 45% in our model. However, given that the company has successfully led its dairy brands to quickly become the market leader, we believe EFOODS should continue to improve its market share in years to come. EFOODS TP Sensitivity to Dairy Market Dynamics
UHT Milk Market Growth CY12-CY14 7% EFOODS Market Share 40% 45% 50% 55% 60% 41 48 54 61 67 9% 44 51 57 64 71 11% 47 54 61 68 75 13% 50 57 65 72 80

Source: BMA Research

The upside risk to our assumptions is the potential ability of Omung to accelerate conversion from loose milk in urban centers. Omung, dairy liquid priced competitively at PKR65/liter, costs less then loose milk prices in some major urban centers in the country. This can, not only increase the rate of conversion towards processed dairy in those cities, but also help EFOODS gain further market share.

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.

Friday, April 06, 2012

Omung Price Compared to Fresh Milk

Fresh Milk Prices 70 65 60 55 50 45 Sargodha Faisalabad Sialkot Bahawalpur Lahore Gujranwala Hyderabad Islamabad Karachi Quetta Omung Price
Omung priced lower then fresh milk

Source: FBS, BMA Research

EFOODS is currently absent from powdered dairy market, but has allocated PKR2.0bn capex for a powder plant in CY12. This should take the company in this market CY13 onwards. Dairy Segment: Projected Growth
mn liters 1,200
Remaining UHT Milk Market EFOODS Market Share

PKR/Liter

800

400

2010A
Source: BMA Research

2011A

2012E

2013E

2014E

2015E

2016E

Juices: Lots to squeeze

EFOODS entered juices and nectars market in CY10 with their Olfrute brand but was able to capture only ~1% market by year end. The market, presently dominated by Nestle, has shown CAGR of over ~25% during the last six years. EFOODS successfully showed volumetric growth of 236% in juice sales in CY11, taking its share to ~3%. We have taken CAGR of 20% for market growth in our model for the next five years and anticipate that EFOODS should be able to capture 15% market share in next five years.

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.

Friday, April 06, 2012

Juices and Nectars: Projected Growth

mn liters 350 300 250 200 150 100 2010A 2011A 2012E 2013E 2014E 2015E 2016E
Remaining Juices & Nectars Market EFOODS Market Share

Source: BMA Research

Ice Cream: Icing on the cake

Pakistans Ice Cream market is dominated by Unilevers Walls, with EFOODS Omore becoming the second largest player with 24% share by CY11. Ice Cream market had an estimated CAGR of 11% from CY06-CY10, but the growth slowed significantly in CY11 due to challenges of higher prices and exacerbating power crisis in the country. We believe that frequent power shutdowns will persist in medium term, which would continue to keep small retailers reluctant from investing in ice creams. These factors have led us to take a cautious approach towards estimating market growth for Ice Cream, and thus we have modeled in 5% CAGR for the market for next five years, far lower then the companys estimates of 11% growth rate for ice cream market. The growth for Omore in CY11 has come primarily from snatching market shares from existing players, besides capitalizing on meager market growth. Walls volumetric sales declined by 12% in CY11 to 43mn liters, taking its share from 69% to 59% by year end CY11. As per EFOODS management, Omore is currently present in less than half of the stores compared to Walls, thus expanding presence of the brand should drive their market share further north. The company continues to invest in its cold chain infrastructure, targeting profitability in this segment by CY13. We have modeled in 40% market share for Omore by CY14. Ice Cream Segment: Projected Growth
mn liters 100 80 60 40 20 2010A
Source: BMA Research
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.

Remaining Ice Cream Market

EFOODS Market Share

2011A

2012E

2013E

2014E

2015E

2016E

Friday, April 06, 2012

Nara Farm & Al Safa Halal: Completing the growth story

EFOODS Nara Farm presently has over 3,000 animals, of which around 1,590 are mature and produce milk. So far the company has not allocated any capital to expand herd size, and the focus remains on improving yields of the herd, which, at around ~12 liters per day, is significantly below the global average for Frisian Jersey Cross breed. EFOODS manages Al-Safa, the halal business based in North America. Presently Engro Corp. (ENGRO), the parent company of EFOODS, owns Al Safa, with the intention to transfer ownership at cost to EFOODS upon completion of regulatory requirement and subsequent approval from SECP. We have not built in Al-Safa into our model. Halal market in North America is dominated by many small unpackaged sellers. This presents room for growth for Al-Safa by competing directly with the unpackaged halal players. However in Canada, halal market is dominated by Zabiya Halal with over 70% market share followed by Al-Safa with 15% share. The management believes that current rebranding strategy and introduction of products to new store chains would provide Al Safa higher penetration. Moreover the company will introduce paratha and rice products going forward.

Expansion: Leading towards a hundred billion top line

EFOODS has ambitious expansion projects in pipeline for their existing dairy, juices and ice cream businesses, besides venturing into additional categories (powdered milk business) within the existing business segments. For CY12, the company has already announced PKR8.7bn worth of capital expenditure towards a new powder plant (PKR2.0bn), expansion of cold chain infrastructure and milk collection and distribution networks. We project that the company has the ability to become a 100 Billion enterprise by CY18, given the potential of the markets EFOODS has successfully tapped so far. EFOODS plans to maintain a long term debt to equity ratio of 50:50, and does not foresee the need for further equity injection for five years forward to fund their expansion. However, the risk of the same cannot be ruled out if the company comes up with a more capital intensive expansion project then currently accounted for. We have modeled in capex assumptions as per the companys guidance in their IPO documents and later revisions. Internally generated cash will be aggressively reinvested in the company. Our model suggests that EFOODS will be able to enter debt repayment phase by CY15, and may start dividend payment post CY16.

Valuation: 19% upside available

We have used four valuation approaches of discounted cash flows and relative price multiples to estimate our Target Price for EFOODS, giving different weightage to each. Based on Discounted Cash Flow approach, our model yields TP of PKR58/sh. If the average historic premium of FMCG stocks is applied to market PER multiple, EFOODS should trade at PKR33/sh based on its CY12CY14 earnings.

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.

Friday, April 06, 2012

Keeping illiquidity of FMCG stocks at KSE in mind, we applied regional price multiples to estimate EFOODS target price as well. Applying appropriate discount to regional FMCG companies Price to Sales multiple leads to TP of PKR72/sh for EFOODS. Similar application of PER multiple of regional FMCG companies leads to a TP of PKR44/sh. Thus, our Dec12 Target Price for EFOODS is PKR57/sh, representing 19% upside from current levels. This leads to our BUY stance on EFOODS. EFOODS: Determining Target Price Methodology DCF Regional P/S Multiple Regional PER Multiple Local FMCGs PER Multiple Final Target Price Weight 35% 35% 20% 10% TP 58 72 44 33 57

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.

Friday, April 06, 2012

DISCLAIMER
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.

ANALYST CERTIFICATION
I, Farid Aliani, hereby certify that this report represents my personal opinions and analysis of information. All views are accurately expressed to the best of my knowledge. I certify that no part of my remuneration is linked either directly or indirectly to recommendations or analysis covered in this report

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Research Team
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Nurali Barkatali

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Farid Aliani

Fertilizer, Food Producers

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Affan Ismail

Cements

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muhammad.affan@bmacapital.com

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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.