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Engro Foods Corporation Limited

Foods – In the limelight as growth avenues broaden
After a sharp 21% correction post the Apr-10 peak, Engro’s stock price has recovered slightly, on the back of (1) below-mean valuations (9.7x 2010E P/E vs. 10-yr avg. of 13.9x) and (2) excitement about a possible foreign acquisition/ greenfield venture by Engro Foods, mentioned by the company CEO in an interview. Engro Foods (UHT milk, ice-cream and, now, fruit juice) is a 100%- owned subsidiary of Engro Corp. (PRs14.66bn in revenue and a PRs435mn loss in 2009). The potential global plans of Foods aside, Engro remains our preferred play on rural consumption growth and supply shortages in Pakistan. Engro Foods is expected to be key contributor to future EPS growth, where we project a 5-year revenue CAGR of 12% and an EPS CAGR of 23% over 2011-16E. 

Going global – a tentative roadmap
While Engro Foods maintains that going global is part of their vision, we believe a full-scale foreign venture may take time to pan out, as (1) model for the same (acquisition vs. set-up) is flexible; (2) Engro still has rice processing (4Q10) and a nationwide ice-cream rollout (timeline undefined, but possible by end 2011-12) to execute. That said, we believe growth in Foods’ export business is in the cards. Engro already exports small amounts of milk and will be exporting rice by year-end. If plans about commercial farm expansion & milk powder launch materialize, this could open further export avenues where the GCC imports significant quantities of milk powder and Pakistan could surface as a low-freight source.

Key takeaways from recent management meeting
Our key takeaway from our recent meeting with Engro Foods is a broadening of the business direction to tap new growth avenues. While UHT remains its bread & butter, new focus areas include powdered milk, commercial farm and fruit juices.

KASB Securities and Economics Research

4 June 2010

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