Friday, December 03, 2010

A peep into Engro Foods Ltd.

Engro Foods (Pvt.) Ltd. (EFL), a wholly owned subsidiary of Engro Corporation (ENGRO),
commenced its first full year of operations in 2007. The Company is currently consolidating its
successful brand portfolio delivering the largest market share (40% market share) in the UHT
liquid milk category. The Company’s portfolio now includes: Olper’s milk, Olper’s cream,
Olwell, Tarang, Tarka, Owesome, Omore and Olfrute.

Dairy Segment
EFL operates two dairy processing plants - third-generation UHT milk plants - located in
Sukkur, and Sahiwal. The Company’s large milk collection network in Punjab has allowed
further rationalization of its cost structure.

During 2008, EFL established Engro Dairy Farm at Nara, Sindh. As part of its long-term
strategy, the farm will provide international standard milk at quite competitive price offering
excellent opportunities to the region in the mid-term. Presently, the number of Australian cows
at the farm stands at 2,468 animals (1,504 adult cows).

Ice cream Segment

EFL entered the ice cream market on April 06, 2009. The project has been launched with a
dedicated state-of-the-art production facility near EFL’s Sahiwal Plant. Current designed
capacity of ice cream segment stands at 17mn litres per annum (47,000 litres per day). Ice
cream is a high gross profit margin business averaging around 30%.

Initially, Omore was launched in selected part of Punjab province, though the Company is
planning to enter in to Sind province in early 2011. With the limited geographic exposure, EFL
is the second largest player in the ice cream segment with a market share of 17%.

Juice Segment
EFL entered the juice segment in May 2010 with the brand name of Olfrute. EFL expects to
capture 20% market share of the juice segment in the next 3-4 years.

Rice Processing Plant

On Nov 03, 2010, EFL incorporated a wholly owned subsidiary - Engro Foods Supply Chain
(Pvt.) Ltd (EFSCL) – a sub-subsidiary of ENGRO. The principle activity of the sub-subsidiary
is to produce, manufacture and trade all kinds of raw, processed and prepared food products
including agriculture, dairy and farming products. For this purpose, 491acres of land has been
acquired at Muridke out of which a meager 65 acres of land has been reserved for the Rice
Processing Plant.

In late 2009, the Board of Directors of Engro approved the setting up of the rice processing
plant with a production capacity of 20k Tons due to become operational in late FY10. EFSCL
will process paddy into rice on toll for EXIMP.

Listing plans
Initially, when Engro launched EFL, it planned to get it listed by FY09-FY10. Now, it is trying
to capture EFL’s value in the project implementation stage so as to get a higher return. We thus
foresee, EFL being offered for listing by FY2012-13!
Valuation
Our DDM based fair value of the EFL – contributing ultimately to ENGRO - stands at
PKR62.27/share. Given below are the key forecasted financials of Engro Foods Ltd.:

Key financial figures

PKR mn FY06A FY07A FY08A FY09A FY10E FY11F FY12F
Sales
Milk 1,506 3,631 8,173 13,914 17,407 22,014 26,029
Ice Cream - - - 751 1,694 2,083 2,440
Juices - - - - 1,008 1,352 1,700
Total 1,506 3,631 8,173 14,665 20,109 25,449 30,169
PAT
Milk (428) (620) (554) 111 653 1,046 1,497
Ice Cream - - - (546) (296) (240) (134)
Juices - - - - (106) (88) (43)
Total (428) (620) (554) (435) 251 718 1,320
DPS - - - - - 1.60 2.74

Assumptions
Segment Loss Break-even Profitable Long-term PAT margin

Milk FY06-08 FY09 FY10 onward 12.75-13.00%

Ice Cream FY09-12 FY13 FY14 onward 16.00-17.00%
Juices FY10-12 FY13 FY14 onward 6.00%
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All rights reserved. The information presented in this report is compiled from sources that we believed to be reliable
in the preparation of this report. However, we do not accept any responsibility for its accuracy & completeness. This
report is not intended to be an offer or solicitation to buy or sell any security. AL Habib Capital Markets (Pvt.) Ltd.
and its employees may or may not have a position in or with respect to the securities mentioned in this report. In
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investors who should seek further professional advice or rely upon their own judgment before making any investment.