Inter Market Perspective To find our Research on Bloomberg, please type - IMKP <GO> www.jamapunji.pk Research Entity Number – REP-085 ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17 & 18 18 September 2017 Yusra Beg [email protected]+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
18
Embed
IMS Coverage Initiation - Engro Foods- 18-09-2017 final …imtrade.biz/.../09/IMS-Coverage-Initiation-Engro-Foods-18-09-2017.pdf · • We initiate coverage on Engro Foods ... NESM.KL
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
InterMarket Perspective
To find our Research on Bloomberg, please type - IMKP <GO> www.jamapunji.pk
Research Entity Number – REP-085
ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17 & 18
• 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
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