Earnings Report /
Pakistan

Friesland Campina Engro Pakistan: Q3 19 review: Marked improvement in sales, but losses continue to pile

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    18 October 2019

    FCEPL posted its second consecutive loss of PKR570mn (LPS: PKR0.74) in Q3 CY 19 vs. NPAT of PKR1mn (EPS: PKR0.00) in Q3 CY 18. The loss was higher than projected as margins nosedived to 8% from 15% seen in both Q3 CY 18 and Q2 CY 19 (lowest since its listing). This brings FCEPL’s 9M CY 19 loss to PKR809mn (LPS: PKR1.05) vs. a profit of 512mn (EPS: PKR0.67) in 9M CY 18. The company did not announce any interim dividend, as was expected.

    Key highlights

    • Strong revenue growth of 17% yoy, with sales sustaining above the PKR10bn/quarter mark is impressive. This indicates that legacy products are holding up, while new product launches (in powder) are delivering on budgeted growth targets (Olpers full cream milk powder has gained 10% market share since its launch in Dec’18). 
    • Gross margins have nearly halved to 8% vs. 15% in the previous quarter and SPLY, lowest since we maintain data on FCEPL. This is perhaps due to the impact of a weaker PKR on imported raw materials, where the company has refrained from completely passing on cost increases to the consumer. 
    • SG&A expenses rose by a modest 4% yoy, despite the revenue jump, indicating strong cost controls. 
    • FCEPL has booked a tax reversal of PKR73mn in the quarter likely on tax credits from accumulated losses. 

    Despite strong sales momentum, this is a poor result by FCEPL, where we expect recovery to come through gradually as costs pressures normalise. FCEPL trades at a CY 20f P/S of 1.24x where we have a Dec’19 TP of PKR66/sh, implying a Sell stance.

    Risks(i) Dilution of market share due to new entrants, (ii) failure to gain meaningful share in the milk powder market, and (iii) retrospective sales tax on tea whitener Tarang.