A review on the progress of Unity Foods Limited

We initiate coverage on Unity Foods Limited (UNITY) with a Dec’21 target price of PKR 54.4/share, representing an upside of 41.7% from last day’s closing. Our investment case is hinged upon:

· Transformation from an edible oil company to a complete staple food company

· Aggressive expansion plans in the company’s edible oil refinery, chemical refinery, fractionation plant and flour mill

· Continued focus to augment market share in the high margin consumer packs segment, and

· Investment in a fractionation plant, chemical refinery, shortening and margarine plant as well as diversification in the production of soap products.

With that said, Unity is now the 2nd largest listed consumer company in Pakistan in terms of sales. At current levels, Unity is trading at the cheapest price to sales ratio in the listed food sector while its forward PE ratio (FY22F / FY23F of 8.1x / 6.6x) also appears enticing. Therefore, we recommend ‘BUY’.

Edible Oil (Vanaspati) to complete staple food company

With the aggressive mind set of management and robust expansion plans, the company has taken little time to achieve major milestones and managed to set strong footprints in the edible oil and flour market of Pakistan (by acquiring 69% of shares in Sunridge foods). Furthermore, company has obtained approval from its shareholders to make further equity investment of up to PKR 461mn to acquire remaining 31% of shareholding in the Sunridge, which will make Sunridge a wholly owned subsidiary of the company. After witnessing significant success in edible oil and flour business, the management is considering entry into the rice business through acquisition or by setting up new rice mill in Pakistan. This transaction will take Unity a step closer to becoming a complete staples food company. The company intends to diversify its business further by setting up a new soap factory and start business of pulses or other food related products. We believe the diversification strategy will increase earnings outlook of the company and also act as a trigger for the stock price of the company.

Triple Digit Growth in Profitability

That said, we expect Unity to continue posting massive growth in profitability going forward due to the fact that the company enjoys a strong customer base, experienced management, concrete liquidity position, state of the art machinery, alongside its upcoming expansion in refinery, fractionation plant, soap, wheat and rice. We expect profitability of the company to grow at 3-yr CAGR of 201%.

Valuation

Our Dec’21 target price (including DCF, P/S and P/E) for the company works out to PKR 54.4/share, which translates into an upside potential of 41.7% from last closing of PKR 38.4/share. Our valuation parameters include beta of 1.4, risk free rate of 9% and a risk premium of 6.0%, which brings cost of equity to 17.4%. Hence, we have a ‘BUY’ call on the scrip. Currently the stock is trading at FY22F and FY23F P/E of 8.1x and 6.6x, respectively. While dividend yield of the company is expected to settle at 2.6% for FY22F.

Courtesy – AHL Research

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