· We have a bullish stance on PREMA which emanates from i) high growth in production capacity, ii) rising market share of pasteurized milk iii) rising composition of value added products, and iv) diversifying product portfolio as the company plans to add allied foods category in its portfolio.

· At-Tahur (PREMA) is a vertically integrated company which has a large footprint in central and northern region of the country. The company started with a herd size of mere 500 animals ,which has now grown to ~4.5k animals (~50% of them fully mature to produce milk) as of 1QFY22 whereas we expect the number to exceed 5k animals by the end of FY22.

The milk production in 1QFY22 stood at 4.6mn liters (12.3%YoY) whereas we expect the production to increase by 15.8%YoY to reach at 5.7mn liters in the upcoming quarter and exceed 6mn liters by the end of FY22. With legislation to curtail the sale of unpasteurized milk in Punjab, the company has landed in a sweet business environment where it can easily increase its footprint in the current vacuum.

· The gross margin of the company has exceeded 30% in the last 2 quarters due to the rising proportion of high margin value added products in the product portfolio. The company has introduced a wide range of products in the span of 2-3 years, which includes package milk (pasteurized), low fat milk, yoghurt (plain, sweetened & flavored) and newly added flavored milks which are also marketed as healthy substitutes to carbonated drinks. The proportion of value added products in the product portfolio has increased from 10% to 30% as of FY21 where as the company plans to increase it to 50% by FY23 as it plans to add new category of allied food products.

· Going forward, the company has plans to gradually increase its footprint to other regions, especially in south where there is a large potential to capture the market share. The company has posted an NPAT of PkR221mn in 1QFY22, translating into PkR1.11/sh (bonus adjusted), growing by 4.27xYoY/2.7xQoQ. We expect the earnings in FY22 to clock in at PkR3.23/sh (+143%YoY) owing to increasing milk production leading to higher sales of milk and rising share of value added products enabling the company to fetch pricing power. Applying a conservative P/E multiple of 15x, we derive the fair value of PREMA at PkR49/sh, implying an upside of 78.2% from the last close. The stock is currently trading at undemanding P/E of 8.5x.

Courtesy – AKD Research