Fauji Foods Limited (FFL) business results for CY20

Fauji Foods Limited (FFL) conducted its corporate briefing session recently to discuss its business results for CY20, and the future roadmap. To recall, losses in CY20 nar-rowed down to PKR 3.1Bn (LPS: PKR 3.8) in CY20, as opposed to PKR 5.8Bn (LPS: PKR 7.2) in CY19. Key highlights of the briefing are summarized below:

Decline in losses was mainly attributed to increase in sales revenue during CY20. The company reported top line of PKR 7.4Bn during the period as against PKR 5.7Bn in CY19, up 28% YoY.

Ranging from UHT milk category to butter, cheese, cream, tea whitener, flavored milk and juice, FFL has a diversified product portfolio catering to varying consumer dairy preferences. The company’s flagship brand, Nurpur UHT Milk recorded a growth of 31% YoY, followed by Nurpur Salted Butter at 37%, Nurpur Cheddar Cheese at 106%, and Dostea tea whitener at 18%. FFL is gradually shifting its focus from volume driven products to value added products, primarily in butter and cheese categories.

Gross margins witnessed a massive turnaround in CY20 to clock-in at 0.8% vs. a gross loss of PKR 0.7Bn in SPLY. This was primarily driven by changes in product mix with greater concentration on value added products, and operational efficiencies. By 2020, the company intends to cater to 85% of dairy consumers of Pakistan.

During 4QCY20 alone, the company posted LAT of PKR 0.6Bn as compared to PKR 2.5Bn is SPLY. Net sales recorded an improvement of 21% YoY to PKR 2.1Bn, where-as gross margins also expanded to 6% in 4QCY20 compared to -7% in SPLY.

FFL is in the process of streamlining its distribution channels to improve its market reach. Apart from collaborations with top retail chains including Carrefour and Metro, it is also partnering with local quick services restaurants and international giants to offer customized food solutions. Currently, its retail universe includes 198,000 outlets which it plans to improve by 35%-40% in the coming years.

As per the management, the company has a decent pipeline of new products that it plans to bring on board in coming years. It has recently launched new variants in butter and cheese segments, which also include 200gms butter tub, unsalted butter category and dairy cream.

Going forward, the company aims to focus on growth in the local market, whereas plans for exports are on cards too. The management is waiting for regulatory ap-provals in specific markets and believe that exports will gain traction soon.

Outlook

We don’t have FFL in our official coverage list but a brief analysis of food sector multi-ples suggests that stock is overvalued. Despite the improvement in financial perfor-mance, the stock still trades at an expensive EV/Sales of 3.50x vis-à-vis food sector aver-age of 2.20x. On the other hand, stocks like Matco Foods (MFL), Unity Foods (UNITY), and At-Tahur (PREMA) are much better value propositions given the current price levels and their fundamentals. In BMA Universe, we have National Foods Limited (NATF) in formal coverage to which we have assigned Dec’21 TP of PKR 283.0/share.

Report by: BMA Capital Management Ltd.

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