VALUE SEEKER

A Daily Publication of InvestCap Research

Pakistan Research
Food Sec, Mkt. Cap. (KSE): Sector Outlook: Food Univ. P/E (2011F) Food Univ. Div. Yield (2011F): Food Univ. Ear. Growth (2011F): Rs287bn Positive 7.79x 15.4% -19.7%

Friday, September 23, 2011

FMCGs continue to shine, profitaibility up 44% in 1H11

Highlights
Profitaibilty up 44% in the 1HCY11 FMCGs outperform KSE100 index again Increased demand to boost bottomlines further

220% 200% 180% 160% 140% 120% 100% 80% 60% 40% Sep-10 Dec-10

Food Sector KSE-100

In today's Value Seeker, we present a profitability review of the listed FMCGs of Pakistan, which shows a massive growth in the 1HCY11 (Jan-Jun11), along with its future outlook.

Profitaibility up 44% in 1HCY11

Consumer goods sector of the country is growing at a rapid pace, as the topline of our sample of the consumer goods companies (Nestle, Uni Lever Pak, Uni Lever Foods, Engro Foods, Rafhan Maize and National Foods) continues to shine, posting a solid growth of 28% YoY during 1HCY11. This trickles down to the bottomline posting an impressive growth of 44% during the same period. This substantial growth mainly came in on account of 1) 15.7% YoY increase in food prices ii) double-digit increase in inflation, touching 13.13% in Jun-11 iii) acceleration in volumetric growth amid catastrophes hitting the country (Floods last year) leading to increased consumption of instant food products, beverages as well as toiletries. However, gross margins declined by 70bps to 27.4% during 1HCY11 (due to escalating raw material prices at the same time). As far as individual companies are concerned, National Foods showed impressive profit after tax, posting a massive 164% YoY growth in 1HCY11, followed by Unilever Pakistan Foods 66% YoY, Nestle 34% YoY and Unilever Pakistan 29% (see table). Engro Foods was listed and joined the party while recording a PAT of Rs216mn against a loss after tax of Rs177mn in the same period last year.

Jun-11
54,370 15,287 28.1% 3,013 5.54%

FINANCIAL HIGHLIGHTS OF FOOD SAMPLE

Rs mn
Sales GP GMs PAT NMs

1HCY11
69,679 19,099 27.4% 4,346 6.24%

Mar-11

1HCY10

YoY
28% 25% -0.71% 44% 0.70%

Sep-11
1HCY11
139% 34% 23% 20% 8% N/A 86% 71% 2.06%

FMCGs outperform KSE100 index again

FMCG sector outperformed the benchmark KSE100 index as it provided a solid return of 71% (86% by sample companies) as compared to KSE100s return of only 2.06% during 1HCY11. Nestle was the top performer once again as its value appreciated by a mammoth 139% in the same period, followed by Unilever Pakistan Foods 34%, Rafhan Maize 23% and Unilever Pakistan 20%. However, increasing energy shortages, higher input prices and poor law & order situation has threatened the overall equity market growth and investor interest.

Source: Company Reports, KSE, InvestCap Rsearch

FOOD SAMPLE RETURNS

Companies/Sector
Nestle Pakistan Limited Unilever Foods Limited Rafhan Maize Products Limited Unilever Pakistan National Foods Limited Engro Foods Limited Sample Companies Total FMCGs KSE-100

Increased demand to improve bottomline further

Ramadan is known to boost foods demand every year, thus we expect 3Q to be even better for almost all the FMCGs. Meanwhile, due to rain-cum-flood situation in Sindh, demand of water and food items is expected to escalate further while continued double-digit inflation would support FMCGs toplines. Thus, we have a Positive stance on the sector. However, at current level, we have a Sell call on ULEVER with Dec-11 TP of Rs4,887/sh. Yawar Uz Zaman yawar@investcapital.com +92-21-111-111-097 (Ext 8630)

Source: Company Reports, KSE, InvestCap Rsearch

Better gas supply brings down urea prices

Since turn of the year, Fertilizer sector of Pakistan has been left out with no option but to increase their prices in order to recover the margins lost due to low level of production as a result of unannounced and extended gas curtailments by the gov't. Major brunt of this was felt by manufactures on the Sui Northern Pipelines Limited (SNGPL) network, as the
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VALUE SEEKER
A Daily Publication of InvestCap Research

Pakistan Research

Friday, September 23, 2011

level of curtailment on the said supplier was more than 25%, with Engro Fertilizer's new plant getting affected the most. However, since Jul-11 onwards supply situation has improved and has boosted up the supply of the sector. During the Kharif harvesting season, price of urea bag reached as high as Rs1,800 (at dealer level). However, with better supply from the said plant has boosted the supply of urea in the market, this coupled with off peak season for urea (DAP is primarily used in sowing of Rabi crops) prices of urea have came down by Rs100-150/bag at dealer level. However, there has been no change in the ex-factory price of the commodity. Thus, our earning expectations for fertilizer sector remains intact. We will release our detailed note on the Fertilizer sector shortly, with complete analysis of the sector and its major players coupled with an outlook. At current levels, we maintain 'Buy' call on FFC and ENGRO with Dec-11 TPs of Rs195/sh and Rs187/sh respectively, while have a 'Hold' call on FFBL with Dec-11 TP of Rs56/sh.

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