We have revisited our investment case for EFOODS and have upgraded outlook by 14%-36% through our forecast range. Earnings revision is underpinned by recent increase in dairy product prices. Furthermore, we have also tweaked our capex assumption for CY12 and have resultantly raised our Dec-end TP of EFOODS by 31% to PkR69/share. At current levels EFOODS is trading at CY12 PE of 25.6x and PS of 1.1x respectively, offering limited upside of 2%, leading to a ‘Neutral’ stance. However, the scrip looks cheap when compared to peers on PEG ratio, where EFOODS is trading at a PEG ratio of 0.4x compared with peers ULEVER and NETSLE which are both trading at 1.1x, underscoring the company’s superior growth potential.
Earnings revised up by 23% over the forecast range: We revise our earnings by 14%-36% through our forecast range after taking into account i) the recent hike in dairy product prices (Olpers and Tarang) and ii) increasing margin assumption for ‘Dairy Omung’, where the product is likely to be only slightly margin dilutive despite it being a lower priced alternative to ‘Olpers’. Furthermore, we have raised our CY12 earnings estimates by 36% to PkR1,971mn (EPS: PkR2.62) after incorporating the said changes in addition to revising up dairy volumetric sales assumption by 4% as well as reducing financial charges by 24% to PkR1.1bn after lowering our capex assumption.
2Q has historically been the best for ice-Cream sales: Taking ULEVER as a proxy, the second quarter (Apr-Jun) has historically been the best for the ice-cream segment, which over the last five years (CY07-CY11) has accounted for 33% of annual sales. Similarly, operating margins have also been the highest during the quarter, averaging at 11% compared to the annual average of just 4%. For EFOODS, we expect a significant jump in ‘Ice-cream segment sales in 2QCY12’, in line with the trend in industry although electricity shortages, particularly in Punjab may be a bit of a dampener.
Milk consumption in Pakistan grew by 3.2%YoY in FY12: As per the FY12 Pakistan Economic Survey, milk consumption grew by 3.2%YoY to 38.7mn liters, in line with the annual consumption growth of ~3% over the last five years. Besides the population growth (avg. of 2.4% pa over the last ten years), per capita consumption has also been rising at an average rate of 1%pa, which is driving milk consumption demand in the country.
Asia Pacific region to drive global growth in LDPs: As per Tetra Pak’s liquid dairy product (LDP) forecast, the Asia-Pacific region (including Pakistan, India and China) will drive the global growth in demand where Tetra-Pak expects the regions LDP demand to grow at a CAGR of 4.6% during 2011-2014, compared with the global CAGR of 2.9%. Consumer switch from loose to packaged milk is set to continue, where in CY11 packaged milk accounted for 49.8% of total white milk consumption, which is still relatively higher when compared with the conversion rate in Pakistan where packaged milk is still less than 10% of total milk consumption, underscoring the growth potential in the sector. Amongst the LDP sub-categories, ‘Lactic Acid Drinks’ (+11.9%) and ‘Baby & Toddler Milk’ (+9%) are forecast to be the highest growth categories. As for EFOODS, any JV with a foreign food operator, particularly in the infant nutritional category could be a game changer given the segments superior growth potential as well as premium margins.
Recommendation: At current levels we recommend ‘Neutral’ stance on EFOODS, which offers limited upside to our Dec-end TP of PkR69. However, the scrip is cheap when accounting for its growth potential where the company’s 5-yr earnings CAGR is forecast at 57.9%, superior to NESTLE (26.7%) and ULEVER (17.5%). Resultantly, the scrip is trading at relatively undemanding PEG ratio of 0.4x compared with 1.1x for ULEVER and Nestle, respectively.
(AKD)
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