EFOODS: 2QCY13 EPS expected at PKR0.95
Engro Foods Limited (EFOODS) is expected to announce its 1HCY13 financial results on July 30, 2013. We expect the company to post a PAT of PKR1.38bn (EPS: PKR1.8), up 35% YoY. 2QCY13 EPS is projected at PKR0.95, up 36% YoY (+11% QoQ).
Lean season would slash margins
We expect a decline in EFOODS’ 2QCY13 margins as lean milk production season leads to slowdown in loose milk supply. Lean season starts from mid April every year and ends in late July during which milk production declines by ~50% from that in flush season. This would lead to a decline in EFOODS’ primary margins and limit gross profit growth. We have estimated EFOODS’ gross margin at ~27% for 2QCY13, down 2pp QoQ. However, gross margin would improve by 1pp YoY.
Tumbling sales to continue in 2QCY13
Rising packaged milk prices together with availability of cheap loose milk and increasing competition eroded EFOODS’ market share in 1QCY13 by 1pp. We believe EFOODS' sales are likely to remain weak during 2QCY13 as well. Milk prices have gone up by 6% since Jan-13, while constantly increasing competition in processed milk market along with ample availability of multiple UHT substitutes at comparable prices is further limiting UHT milk growth. We expect that EFOODS’ brand ‘Tarang’ would continue to post stellar growth given its low price and strong market in rural areas, while demand for ‘Dairy Omung’ and ‘Omore’ would deteriorate further going forward.
PT raised; hold maintained
Based on a growth slowdown, we revise down our EPS estimates for EFOODS by 25% to PKR4.1, up 22% YoY. We have rolled forward our PT horizon to June-14 and raised it to PKR162 based on sector average CY14 PER and EV/EBITDA of 32x and 16.5x respectively. The stock offers an upside potential of 2%. We maintain HOLD!