Earnings Report /
Pakistan

Friesland Campina Engro Pakistan: 4QCY19 preview: Net loss to divert attention from improving sales

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

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    Intermarket Securities
    4 February 2020

    We expect FCEPL to post 4QCY19 Net Loss of PKR572mn (LPS: PKR0.75), vs. 4QCY18 Net Loss of PKR448mn (EPS: PKR0.58). This should take CY19 Net Loss to PKR1,381mn (LPS: PKR1.80), vs. NPAT of PKR64mn (EPS: PKR0.08) in CY18. While FCEPL’s revenue has stabilized to PKR10bn/quarter, earnings pressure is likely to continue into 4Q due to rising inflationary pressures and high branding/marketing expenses for both existing and new products. We do not expect FCEPL to announced dividends.

    FCEPL is expected to report impressive 17%yoy growth in sales to PKR9.97bn (sequentially lower due to seasonality) led by a recovery in market share of established brands and success of recent new product launches (OLPER’s full cream milk powder, OLPER’s Pro-Cal). Quarterly run-rate of PKR10bn however, is still lower than FCEPL’s potential, in our view.

    Raw material costs are likely to remain elevated, with gross margins expected to clock in at 7.8%, vs. 8.7% in SPLY. Packaged milk producers have yet to increase prices in line with rising inflationary pressures while most loose milk producers have raised prices by PKR15-20/Ltr to PKR100-108 in certain cities (taking the national average to PKR94/Ltr). This has significantly narrowed the price differential between loose and packaged milk to c. PKR30/Ltr. We expect inflationary costs to be passed on in the coming months.

    Despite a sharp rise in sales, we expect SG&A expenses to remain stable at PKR1.3bn vs. SPLY due to notable cost control witnessed in 9M19 (SG&A expenses as % of sales have come off from 15.9% in CY18 to 13.7% in 9M19.

    We expect a gradual improvement in profitability from CY20f as cost pressures begin to ease off (inline with the rise in packaged milk prices) particularly amid expected new product launches. FCEPL trades at bottom-of-the cycle valuations on P/S (1.15x) but remains very expensive on P/E (CY20: 63.9x), where we have a Dec’20 TP of PKR65/sh, which implies Sell rating.