Inveslink Capital (Pvt) Ltd. Company updates: (September-3-2013) Engro Foods: Look beyond 2013 With turn of 2013, the relatively new entrant, Engro Foods (Efoods), shocked its investors by posting 11% and 13% decline in dairy volumes during 1Q2013 and 1H2013, respectively, with bearish outlook for 3Q2013. This fact is hard for some investors and analysts to swallow that volume of a consumer company can experience a double-digit decline. As a result, Efoods share price has fallen drastically since it released its June quarter result. We highlight company specific distribution and management issues as the prime culprits behind this, which will be resolved in coming quarters, we expect. When everyone is seeing negativities, we recommend ‘Buy’ on the scrip as the growth potential, which is the original charm of the food producer, is still intact. The stock trades at 2014F & 2015F PE 29.8x & 19.6x and PS of 1.7x & 1.4x, respectively. Distribution & Management issues For the decline in Efoods’ dairy sales, company specific distribution issues and their mismanagement are to be blamed. However, we are confident about the growth potential, though there are some signs of shift in the consumers’ dairy preferences and mild slowdown in overall consumer sector in Pakistan. We believe that 2013 will be a bad year for Efoods and it will take some time to realign distribution channels and to learn from their past mistakes. Consumer sector still at fast lane Consumer stocks in Pakistan were long seen as the darling of local as well as foreign investors. This is because of rising consumer base, which had consistently provided above average growth. In last 5 years, sales of listed consumer firms (based on 27 consumer companies) increased by CAGR of 18% while profits rose by CAGR of 20%. Though hard to believe, we have witnessed mild slow down in the latter half of 2012 and early 2013 but the situation normalized in 2Q2013 with sales growth of 9.8% QoQ. Earnings revised: Short-term pain, long-term gain We have trimmed down our 2013 and 2014 EPS forecasts of Efoods to Rs2.5 and Rs3.3, respectively. However, we are still optimistic on the long-term growth story. Because of the sharp fall (40% in last 30 sessions) in its share price and our conviction that distribution issue will be resolved, we have upgraded Efoods from ‘Hold’ to ‘Buy’ with the revised target price of Rs115. Regard, Azhar Hussain
Posted on: Tue, 03 Sep 2013 06:23:03 +0000
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