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Pakistan

Friesland Campina Engro Pakistan: Q4 CY 19 review: Lower than expected, but a loss nonetheless

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

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    Intermarket Securities
    7 February 2020

    FCEPL posted a net loss of PKR146mn (LPS: PKR0.19) in 4QCY19 vs. net loss of PKR448mn (EPS: PKR0.58) in 4QCY18. The loss was lower than projected as margins recovered to 12.7% from around 8% in both 4QCY18 and 3QCY19. This took FCEPL’s CY19 loss to PKR955mn (LPS: PKR1.25) vs. a profit of PKR64mn (EPS: PKR0.08) in CY18. The company did not announce any dividend, as was expected.

    Major takeaways from the quarter: 

    • Strong revenue growth of 19% yoy, with sales sustaining above the PKR10bn/quarter mark, which came in line with estimates. This indicates that legacy product sales are on the rise, while recent product launches (in powder) are delivering on budgeted growth targets (Olpers FCMP gained c. 12% market share since its launch in Dec’18), in our view.
    • Despite seasonality (Aug-Dec is semi-flush season amid low demand), gross margins improved to 12.7% in 4QCY19 vs. 8.7% in SPLY, and 8.2% in the previous quarter. This likely follows a more stable PKR resulting in better cost management. It is pertinent to mention that the company has refrained from completely passing on inflationary pressures to the consumer and may do so in the upcoming quarters.
    • SG&A declined by 4%yoy to PKR1.26bn, despite the revenue jump, indicating strong cost controls (in-line with estimates).
    • Operating loss of PKR15mn in 4Q is much lower sequentially (vs. PKR327mn in 3Q) despite the element of seasonality.
    • FCEPL has booked a tax reversal of PKR67mn in the quarter likely on tax credits from accumulated losses.

    Highlights of CY 19 results: 

    • FCEPL reported strong 20%yoy growth in CY19 sales to PKR38.9bn led by higher market share in new milk powder segments and recovery in existing brands. We discern that FCEPL is once again leading in the UHT milk segment. Gross margins came off to 13.3% vs. 15.9% in CY18 but we draw comfort from the year-end recovery in 4Q margins. Operating profits came off to PKR121mn, down 76%yoy while FCEPL reported a tax reversal of PKR145mn, where loss on a pre-tax basis is much higher.

    Despite a net loss in CY 19, we are encouraged by the noticeable improvement in all major line-items, where FCEPL is visibly focused on reducing costs, while sustaining sales at PKR10bn/quarter. If this momentum continues, we would turn more positive on FCEPL, where faster-than-expected recovery in profitability is a key trigger. FCEPL trades at a CY20f P/S of 1.13x where we have a Dec’20 TP of PKR65/sh. Reiterate Sell.