FCEPL has posted a Net Loss after tax of PKR145mn for 4QCY20 (LPS: PKR0.19), mirroring LPS of PKR0.19 in 4QCY19. This takes CY20 NPAT to PKR177mn (EPS: PKR0.23) an improvement over Net Loss of PKR955mn (LPS: PKR1.60) in CY19. While we are impressed with consistently high sales delivery (PKR11.8bn in 4Q), higher cost of milk procurement due to inflationary pressures and inability to pass on costs has restricted translation to the bottom-line with GMs dropping to 9.2% vs. 11.5% in 3Q.

Key highlights for 4QCY20:

FCEPL depicted a sharp 16%yoy growth in sales to PKR11.8bn in 4Q, led by (i) strong volumetric growth particularly in Olpers, (ii) recovery in market share of established brands and (iii) success of its recently launched products.

Gross margins came off to 9.2% in 4QCY20, vs. 12.7% in SPLY (and 11.5% in 3QCY20) on high cost of milk procurement led by inflationary pressures. We understand FCEPL has taken a large price increase at the end of December 2020 which should translate into better margins in 1QCY21 and lead to strong results.

Despite a sharp rise in sales, SG&A expenses remained stable at PKR1.2bn vs. PKR1.3bn in SPLY due to notable cost control – SG&A expenses as a percentage of sales have come off from 12.5% in 4QCY19 to 10.0% in 4QCY20.

We acknowledge FCEPL’s U-shaped recovery in sales, where the translation to the bottom-line is expected to follow gradually. FCEPL has recovered much of its market share and is once again the leader in the UHT space. FCEPL trades at bottom-of-the cycle valuations with 1.2x P/S but remains very expensive on P/E (CY21f: 41.4x). We will look to revisit our stance post release of detailed financial accounts. For now, we have a Sell rating on the scrip.

Courtesy – Intermarket Securities Limited.