Experts raise their CY21-25f EPS estimates for FCEPL by 14% on average after incorporating recent budgetary changes for milk producers which leads us to raise our Dec’21 TP to PKR110 (vs. PKR75/sh previously). That said, the c. 40%CY21td price run up leads us to maintain a Neutral rating.
The Government agreed to reinstate “Zero Rating status” on UHT milk and nutritional milk powder which was previously abolished in the Federal Budget 2016-17. This is estimated to incur annual tax savings of c. PKR4bn for the formal Dairy sector with FCEPL a key beneficiary. We estimate a 5yr sales/profit CAGR of 16%/114%.
FCEPL is primed to launch new products in the Dairy space with extensions into yoghurts, cheese and nutrition. Better margins in these categories will drive the next leg of growth – a key upside risk to our base case estimates (which include milk powder categories).
Estimates and TP raised on recent budgetary changes
We raise our CY21-25f EPS estimates for FrieslandCampina Engro Pakistan Ltd. by 14% on average after incorporating recent budgetary changes for milk producers. To recall, the Government agreed to reinstate “Zero Rating status” on UHT milk and nutritional milk powder – previously abolished in the Federal Budget 2016-17. This is estimated to incur annual tax savings of c. PKR4bn for the formal dairy sector with FCEPL a key beneficiary. Our earnings for CY21/22f are 12%/16% higher at PKR2.40/4.50 respectively where we estimate 5-year sales/profit CAGR of 16%/114%. This leads us to raise our Dec’21 TP to PKR110 from PKR75 previously. That said, the c. 40%CY21td price run-up has adequately captured recent events leading us to maintain our Neutral rating. The next leg of growth can emerge from the launch of new products in the dairy space where better margins in these categories will drive profits. FCEPL trades at a CY22f P/E of c. 25x.
Savings from Zero rating to be pocketed
To recall, UHT milk has remained under the “Exempt category” since its removal from “Zero Rated Regime” in the Federal Budget 2016-17 during PML-N’s Government. This was done in order to avoid payment of tax refunds to the dairy sector and consequently prohibited UHT milk players from claiming tax refunds on inputs in the future. Under the Finance Bill 2021-22, UHT Milk has been formally moved to the Zero Rated Regime. FCEPL will now be able to claim sales tax refunds on inputs which translates into sizeable savings of c. PKR7-8/liter (or over 5% of the retail price). Importantly, FCEPL will not be passing on the impact of these savings to the consumers but will instead utilize the funds to increase awareness of the benefits of packaged milk vs. loose milk and for infrastructural development at the farm level. That said, tax refunds are likely to be received with a lag as witnessed in pre-2016.
Next leg of growth to emerge from new products
FCEPL plans to launch new products, with a 7-8mths lead time to market, under the Dairy space with extensions into yoghurts, cheese and nutrition. These categories are expected to have better margins vs. UHT segment. FCEPL will continue to grow with 2-3 innovations per year. That said, clean milk will continue to remain at the heart of the business. This should coincide with double-digit growth targeted for its existing Dairy & Beverages portfolio. Our base case estimates include milk powder categories for now (Full cream milk and Growing-up milk).
Dairy sector will remain in the limelight
We think a broad based recovery is underway in Pakistan’s Dairy sector, with FCEPL being a key beneficiary. The zero-rated regime will lead to savings of c. PKR7-8/litre for FCEPL which together with rebounding sales of the existing brands and potential new product launches should spearhead strong growth in the coming quarters. Additionally we estimate 2QCY21 earnings of PKR0.62/sh, in our view, up 12%yoy. This will be driven by strong ice-cream sales and strong margins.
Courtesy – Intermarket Securities Limited