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JS Securities Limited – Morning Briefing

Karachi, January 09, 2018 (PPI-OT): EFOODS: 4Q2017 likely to bring more misery, EPS expected at Rs0.08/share

We preview Engro Foods (EFOODS) 2017 earnings where we expect the company to post earnings of Rs442mn (EPS: Rs0.58), recording a sharp drop of 81% YoY from last year’s earnings of Rs2.39bn (EPS: Rs3.12).

The Dairy and Beverages segment of the company is likely to witness 21% YoY drop in revenues given the impact of (1) higher prices on volumes and (2) decline in electricity outages resulting in higher consumption of loose milk.

In 4Q2017, we expect seasonality to hit EFOODS’s earnings. We expect 4Q2017 EPS at Rs0.08, as we estimate declining YoY trend in the Dairy segment to continue in the last quarter.

We reiterate our ‘Hold’ rating on EFOODS with a Dec-2018 Target Price of Rs83.

4Q2017 EPS likely at Rs0.08

We preview Engro Foods (EFOODS) 2017 earnings, where we expect the company to post earnings of Rs442mn (EPS: Rs0.58), recording a sharp drop of 81% YoY from last year’s earnings of Rs2.39bn (EPS: Rs3.12). The decline stems from potential 19% YoY lower sales, with gross margins contracting to 17% (2016: 23%). The Dairy and Beverages segment of the company is likely to witness 21% YoY drop in revenues given the impact of (1) higher prices on volumes and (2) decline in electricity outages resulting in higher consumption of loose milk.

On the other hand, Ice Cream and Frozen Desserts segment’s revenues are likely to keep at similar levels compared to 2016; however, gross margin is likely to decline to 39% (2016: 45%). For 4Q2017, we expect seasonality to hit EFOODS‟s bottom- line. We expect 4Q2017 EPS at Rs0.08, as we estimate declining YoY trend in the Dairy segment to continue in the last quarter.

‘Hold’ intact with TP of Rs83

We reiterate our „Hold‟ rating on EFOODS with a Target Price of Rs83. The stock has gained 13%, in-line with KSE-100 index return during the recent uptrend at the local bourse. We expect EFOODS‟ earnings to post a 5-year CAGR (2017E-22F) of 58% because of (1) low base of 2017E earning base, (2) stable growth in dairy segment and (3) increasing contribution from Ice Cream segment. On the other hand, the Inland Revenue has issued sales tax orders to dairy companies that sold tea whiteners during 2017, which barred tea whiteners from availing sales tax incentives (zero rating/exemption) offered to dairy products and as a result ordered them to pay sales tax on tea whiteners.

Taking cue from sales tax order received by Fauji Foods (FFL, Rs1.2bn including Rs225mn penalty), we estimate payment demand for the same from EFOODS could be ~Rs15bn (Rs20/share). However, since the company expects a favourable decision from the appeal filed against the sale tax order, it has not mentioned the order under contingencies or made any provisions for the mentioned costs in its financial accounts. We highlight (1) lack of diversification in product portfolio and (2) rebound in international milk powder prices as other key risks to our investment thesis.

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