Pakistan: Analysts rate Engro Foods a ‘long-term buy’


Even though they differ on whether the offering price is worth it, market analysts and institutional investors seem to agree on one thing about the Engro Foods initial public offering on the Karachi Stock Exchange: it is likely to be a good long-term investment.

Analysts at two of Pakistan’s leading investment banks, JS Global Capital and BMA Capital, both seem to be enthusiastic about the offering, each recommending to their clients that they subscribe to the offering, the last day of which is Thursday (today).

The strong rating is despite the fact that neither JS nor BMA is part of the consortium that is underwriting the IPO. That honour went to the investment banking divisions of the National Bank of Pakistan and United Bank, who are joint lead-arrangers of the offering.

The offering price of Rs25 per share, which values the company at Rs18.2 billion ($211 million), has raised some eyebrows, though. The company’s net income in 2010 was only Rs177 million, though Engro Foods projects that this will rise to Rs727 million for 2011 and Rs1.7 billion for 2012.

The price-to-earnings ratio – the stock price of the company divided by its earnings per share (a key measure for valuing a company) – comes to 25.7, compared to an average of about 9 for the KSE 100 index.

“The premium seems exorbitant,” said Gule Zehra Jafri, a consumer goods analyst at KASB Securities, an investment bank with one of the most respected research teams in the country. Jafri advises her clients to buy the stock, but asks them not to be aggressive in building up a position.

One of Jafri’s key concerns is that Engro Foods may simply be the beneficiary of a global rise in agricultural commodity prices, which may raise questions about the company’s long term revenue growth, especially if those prices stabilise or start to come down.

Engro Foods executives, however, feel that the company’s business model relies not just on an increase in consumption within Pakistan, but also a shift in consumption patterns based upon a growing middle class, something that would actually be accelerated if commodity prices started to stabilise.

“The packaged milk industry is only 4% of total milk consumption in Pakistan. Don’t you think that more people will switch over to packaged milk compared to conventional milk vendors if the prices of milk stabilise?” asks Imran Anwer, the chief financial officer of Engro Foods.

The company – which produces packaged milk, ice cream, and fruit juices – is also in the process of accelerating its own rice export business in addition to entering the North American halal food market. Engro Foods’ biggest success thus far has been the packaged milk business, where it went from zero to dominant market player (39% market share) in just over five years.

Institutional investors on Karachi’s Chundrigar Road, meanwhile, seem to like the stock.

“Engro Foods is a long term growth story,” says an equity portfolio manager at one of the largest asset management companies in Pakistan. “It is definitely worth having in our portfolio and given that it is a small offering, I think this is the time to buy it.”

Engro Corporation, the parent conglomerate of Engro Foods is selling only about 27 million out of the company’s 748 million shares, or about 3.6% of the firm.

There has, however, been speculation that the stock price may fall soon after its IPO, given what one portfolio manager called “the market’s anti-Engro sentiment.” Nonetheless, that same portfolio manager said that he planned on buying the stock once it falls. He is counting on it falling to between Rs20 and Rs22.

Published in The Express Tribune, July 7th, 2011.