Engro Foods:good company, bad timing

With 9-year low volume and subdued investors’ confidence in local stock market, Engro Corporation (ENGRO) has planned to list its consumer business, Engro Foods Ltd (EFL). In spite of depressing conditions, this offering presents an ideal opportunity for investors to take long-term exposure to fourth largest middle class consumer segment of developing Asia . However, unnerving market situation could deter the retail investors to take exposure in the company as was observed in last few offerings unless institutions subscribe to this issue. Though in the short term the price of the stock will depend on the subscription figures but our target price for EFL is Rs32/share based on different valuation techniques. The stock compares favorably with local and regional consumer stocks as it is being offered at 2012F PE of 12.1x and price-to-sales of 0.5x

In the IPO, Engro Corp plans to sell 27mn share of Engro Foods to general public at Rs25 with IPO size of Rs675mn (US$7.8mn) Previously, Engro Foods has already placed 48mn shares to foreign & local institutional investors at Rs25 per share.

Thanks to 5-years of aggressive brand marketing, EFL managed to increase revenues by 93% CAGR to Rs21bn (US$244mn), with 44% growth seen in 2010. As a result, in short span of time EFL is now almost half of the size (in terms of revenues) of two largest consumer firms’ Nestle and Unilever which have been in local business since many decades. This rising revenue apart from providing growth visibility, indicates management confidence on Pakistan consumption story specially packed milk market of US$1bn (total milk market is US$14bn) which is expected to grow by 12% during next 5-years, according to company estimates. This would push total revenues to Rs80bn in 2015 from Rs21bn in 2010.

Company’s flag ship milk business has finally reaped its benefits with year 2010 being the first year of its profits. With planned expansion on cards, revenue of dairy and ice cream business is expected to grow by 5-year CAGR of 25% and 36%. Milk business is already in profits while we believe ice cream business to become profitable in 2012.