Barkat Frisian IPO: Are You Egg-Cited?

February 16, 2025 (MLN): There's a new egg in the basket, Barkat Frisian Agro Limited (BFAL), a Pakistan-Dutch joint venture that is all set to spread its wings and take a giant leap with its egg-citing Initial Public Offering (IPO) at the Pakistan Stock Exchange (PSX).

From humble beginnings in 2017 to becoming Pakistan’s first and only producer of pasteurized egg products, BFAL has hatched a golden opportunity for investors through its IPO. With PSX on a bullish streak and investor confidence making a comeback, BFAL's listing aligns perfectly with the market’s upward momentum, offering a timely and promising entry point for investors.

With a state-of-the-art production facility in Bin Qasim Industrial Park, Karachi, BFAL is the leading innovator in the Pakistani pasteurized egg products market. From pasteurized whole eggs to egg yolks and egg whites, the company’s top-notch products have earned a stellar reputation for quality, safety, and taste.

The entire Issue will be offered through Book Building Method at a Floor Price of Rs13 per share, including premium of Rs12 per share or 1200% with a maximum price band of up to 40%- Rs18.2 per share.

Justification of 1200% premium

We dug deep into the prospectus and, through our interview with Mr. Muhammad Adil Ali, CEO of the Company, we uncovered several factors justifying the 1200% premium. Firstly, the safety assurance and extended shelf life of pasteurized eggs add significant value and efficiency in food preparation.

Mr. Muhammad Adil Ali emphasized that handling eggs can be delicate, and their pasteurized products provide ease and convenience. Furthermore, pasteurized eggs significantly reduce the risk of salmonella, leading consumers and businesses to prioritize this safety guarantee and be willing to pay a higher price.

Basically, it’s a Pakistani - Dutch joint venture established in Pakistan with the aim to lead change in the food processing and manufacturing industry of Pakistan by providing nutritious, healthier and convenient products.

In pursuit of its aim, BFAL became the only company in Pakistan to produce pasteurized egg products, strengthening its presence in the market and constructing a strong brand image in the local and global markets.

Not to forget, within a short span of five years, Barkat Frisian has secured a large number of long-term clients locally and globally such as Kerry Group, Siri Lankan Airlines, Mondelez Areej Vegetable oils & Derivatives etc, highlighting its strong commitment to delivering exceptional products and dedication to its mission.

Just like with any new company's prospectus, we at Mettis Global found several areas that raised significant concerns during our review. Here is what the CEO, Mr. Muhammad Adil Ali, responded:

MG: Net margins have doubled in FY25 so far, but cash flow has declined. Why is that?

AA: In the first half of FY25, we actually generated positive cash flow from operations compared to the same period last year. Moreover, our net cash flow turned positive, whereas it was negative in the first half of FY24. This is a significant improvement for us. However, keep in mind that as a B2B company, we primarily sell on credit. This means that higher sales require more cash, as we need to extend more credit to our customers.

MG: Why did the company convert loans into equity? Were cash flows unable to sustain repayments?

AA: The loans we converted were initially brought in between 2018 and 2020 and were always meant to be part of our equity structure. Most of these loans were interest-free sponsor loans, which provided us with a lot of flexibility. Converting them into equity wasn't just about managing cash flows—it was also about meeting the minimum capital requirements set by the Pakistan Stock Exchange (PSX).

MG: What was the rationale behind converting debt into equity right before the IPO? Was it a strategic move to improve financial health?

AA: Absolutely! Converting the loan into equity helped us present a stronger financial position to potential investors. It showed that our sponsors were committed to the long-term success of the company, making it a strategic move to enhance our financial health just before the IPO.

MG: Currently, your sales are highly concentrated, with the share of the top two clients increasing. Do you expect this trend to accelerate after capacity expansion?

AA: Actually, we expect customer concentration to decrease as we expand our capacity. Our exports are on the rise, and we have new customers waiting on the sidelines because of our current capacity constraints. Once we expand, we'll be able to meet the demands of these new customers, which should diversify our client base.

MG: What is the share of your exports, and what are the margins there?

AA: Currently, exports make up 15% of our sales, up from 10% in FY24. We're optimistic about the future and expect this number to reach up to 25% in the next few years. This growth highlights our ability to tap into international markets and achieve higher margins.

The increase from 10% to 15% in export sales is a positive sign, but the CEO does not provide detailed information about the actual margins achieved in international markets.

MG: The prospectus mentioned that your gross margin will sustain at 12% post-IPO, but historically, this hasn't been the case. What factors ensure sustainability now?

AA: BFAL operates on a cost-plus model, and as the only manufacturer of pasteurized eggs in Pakistan, we have the unique ability to improve our gross margins. However, we are taking a long-term strategic approach by prioritizing market expansion and customer acquisition over short-term margin gains.

Our unique market position allows us to maintain these margins while focusing on growth and market penetration. This strategy ensures that we can sustain the 12% gross margin moving forward.

MG: The financial projections indicate a 66% CAGR in net profit over the next three years. What factors underpin this aggressive growth, and how realistic are these estimates?

AA: We are setting up a new production facility with a capacity of 12,000 tons, which is expected to bring significant cost savings in freight. This is because 80% of our raw materials come from Punjab, where the new facility is being established.

With this increased production capacity and growing export demand, we expect the new plant to achieve high-capacity utilization. This will drive profitability through volumetric growth, making our financial projections quite realistic.

MG: What is the expected break-even period for the Faisalabad plant, and how does BFAL plan to maintain profitability during this expansion?

AA: We are looking at the Faisalabad facility becoming operational by Q1 of CY26. Currently, 35% of our sales are in Punjab, which we're fulfilling through our Karachi plant. Once the Faisalabad facility is up and running, we'll transfer that portion of sales there, boosting our operational efficiency.

Moreover, we are actively engaging with several potential customers, and with the growing demand, we expect to achieve rapid capacity utilization. This will help us ensure profitability for the new facility right from the start.

MG: BFAL is currently the sole producer of pasteurized egg products in Pakistan. What strategies are in place to sustain this monopoly and prevent new entrants from capturing market share?

AA: Our strategy focuses on penetrating the market by keeping our rates low, which makes it less attractive for new entrants to compete. We also have the first-mover advantage. Since our sales are B2B and credit-based, we can easily adjust our credit terms to manage cash flow efficiently.

MG: Why do you anticipate a boom in powdered egg sales in Pakistan?

AA: Currently, we're dealing with liquid and frozen eggs, but we plan to start producing powdered eggs in the near future. In Pakistan, there's a lack of awareness about the benefits of powdered eggs, and many customers still require them for their recipes.

About ten years ago, Pakistan used to import a significant volume of egg powders because many recipes and ingredients were based on powdered eggs. We see a growing demand for this product, and once we start producing it, we'll also target the export market. This dual approach should help us tap into both local and international demand.

MG: With only 10% of the domestic market addressed, what challenges does BFAL face in increasing penetration, and how does the company plan to scale its market share?

AA: Since we operate in a B2B setup, one of our main challenges is conversion. We need to educate people about the benefits of our products, emphasizing that they are safe, better, and more convenient. Ensuring hygiene is also a key point.

Raising awareness is a slow and gradual process, and it's not easy. However, as the market grows, more people are becoming aware of these advantages. We are committed to penetrating the market further by continuing this education and leveraging the growing demand.

MG: What competitive advantages does BFAL have against international suppliers from China and India that target the same Gulf export markets?

AA: We market our product as a European quality product made in Pakistan, which gives us a unique edge.

In the ingredients sector, it can be challenging to sell Pakistani products globally. However, thanks to our Dutch partner's expertise, reputation, and customer base, we have been able to enter the lucrative Middle Eastern market successfully.

The Company has established a strong geographic footprint across international markets in the Middle East, including Kuwait, Bahrain, UAE, KSA, Qatar, Oman, and Egypt. This regional presence enables them to deliver tailored solutions and foster close relationships with their clients.

Furthermore, BFAL is in process of establishing a subsidiary in United Arab Emirates to further fortify its presence in the international market. The Company has already attracted international clients like Mondelez, Sri Lankan Airlines and Kerry Group for the next fiscal year.

Another advantage is that while prices in Pakistan are competitive, our customers are very quality-conscious. They choose to buy from us because of the European name and quality assurance. This combination of competitive pricing and high-quality standards sets us apart from international suppliers.

MG: Given the company's expansion plans, how does BFAL intend to maintain product quality and ensure a steady supply chain of raw materials (eggs)?

AA: Our family has a strong background in poultry and textile, so we have a wealth of experience in poultry and its supply chain. We are currently very active in the poultry industry and have contracts with select high-quality farms. By working with these limited, reliable farms, we ensure that our product quality remains top-notch.

Additionally, we have in-house teams dedicated to quality control. They check the quality of our products in-house and regularly visit our suppliers to ensure that everything meets our standards.

This rigorous process helps us maintain consistent quality and a steady supply chain as we expand.

MG: What risk mitigation strategies are in place in case of a decline in demand from key export destinations such as the UAE, KSA, and Oman?

AA: We don't foresee a decline in demand, as markets are growing and people in the Middle East are becoming more aware of the benefits of pasteurized eggs.

About 20 years ago, there was no concept of pasteurized eggs in the Middle East. While demand is unlikely to decrease, our product might face challenges in remaining price-competitive.

However, eggs in Pakistan are competitively priced compared to global standards, where eggs tend to be more expensive. Europe used to be a major supplier of eggs to the Middle East, but now, due to strict compliance, government regulations, and animal welfare concerns, farming there has become more expensive.

This gives us a competitive edge in the medium to long term, as we can offer quality products at competitive prices.

MG: What are the key demand drivers for powdered eggs, and how do they compare to fresh eggs in terms of market acceptance?

AA: It's definitely a challenging task, but not impossible. Bakeries, for instance, have a price advantage with powdered eggs because they have a shelf life of one year. There are certain price-sensitive customers, so if we produce egg powder during the off-season, it will be a win-win situation for everyone.

Additionally, we're seeing a trend where low-segment restaurants are starting to convert to powdered eggs. The longer shelf life and cost-efficiency are major factors driving this shift. As awareness grows, we expect more businesses to adopt powdered eggs for their convenience and practicality.

MG: What industries besides bakeries do you see as key consumers of powdered eggs?

AA: Powdered eggs have a wide range of applications beyond bakeries. Key industries include sauces, ice cream, and cooking. These industries benefit from the convenience, extended shelf life, and consistent quality that powdered eggs offer.

Plus, with Barkat planning to launch powdered eggs within the next 12-15 months, businesses can manage inventory more efficiently. As more industries discover these advantages, we are expecting even greater adoption across these sectors.

MG: How much savings or value enhancement does this product provide compared to existing alternatives?

AA: Our range of products is designed to cater to various needs, offering options like only yolk, only white, and whole egg. This flexibility helps our customers save resources and prevent wastage.

By providing specific egg products tailored to their requirements, we enable them to use exactly what they need without any excess, ultimately leading to cost savings and enhanced value in their operations.

MG: What contingency plans are in place in case of fluctuations in poultry feed prices, which directly impact egg costs?

AA: In Pakistan, egg prices are quite volatile, and they're more influenced by demand and supply factors rather than feed costs. We closely monitor these fluctuations. Our pricing mechanism is very transparent with our customers; if egg prices are high, our prices are high too. This ensures that everyone is on the same page.

MG: What impact would supply chain disruptions (e.g., avian flu outbreaks, feed shortages) have on BFAL’s operations, and how does management plan to mitigate such risks?

AA: During situations like avian flu outbreaks, people tend to avoid buying eggs, which causes prices to drop. This actually works in our favor because our pasteurized eggs are heat-treated and free from viruses. So, our margins improve, and customers get virus-free products. It’s a win-win situation for us and our customers.

MG: With growing consumer awareness regarding organic and free-range eggs, does BFAL plan to expand into premium or value-added egg segments?

AA: Absolutely! We are planning to enter the table egg category with high-value-added products like organic and free-range eggs. This move will allow us to cater to the growing demand for premium and value-added egg segments, meeting the preferences of health-conscious consumers.

MG: Are there any plans to diversify the product portfolio beyond egg-based products in the future?

AA: Yes, absolutely! Our long-term plan includes expanding into agricultural value processing. We aim to leverage our expertise and resources to develop a diverse range of high-quality agricultural products, beyond just egg-based items.

MG: How does BFAL plan to maintain its tax-exempt advantage beyond 2036 when exemptions expire for the Faisalabad plant?

AA: Right now, our strategy is focused on market penetration. We believe that by 2035, it will be the right time to shift our focus away from market penetration. At that point, we'll start rationalizing our prices. By building a strong market presence now, we aim to secure a sustainable advantage that will help us maintain our competitiveness even after the tax exemptions expire.

To note, BFAL currently has one plant operational in Karachi which is SEZ entity and is exempt from income tax (both normal & minimum tax levy) for 10 years from the date of commencement of business and on the basis of this exemption the company can obtain exemption on advance tax (WHT) deduction from receipts from customers.

The tax exemption is till 2029 for the Karachi plant and 2036 for the upcoming Faisalabad plant, under minimum tax regime.

After the tax exemption ends, BFAL will be charged a reduced minimum tax rate of 0.75% of its revenue instead of 1.25% in cases where the company's earnings are insufficient for the corporate tax rate of 39% to exceed the minimum tax due to its operations in the poultry sector.

The Company has also already acquired tax exemption for the new plant that the Company aims to construct at M3 Industrial City, Faisalabad. The exemption is 10 years from commencement of commercial operations till FY 2036.

Income is exempt from income tax, including both normal and minimum tax levy, for a period of ten years from the date of commencement of business. Based on this exemption, the company also qualifies for an exemption from advance tax (withholding tax) deductions on receipts from customers. Furthermore, import duties and taxes are waived on the first-time import of plant and machinery for production facilities established within any Special Economic Zone (SEZ).

MG: In a low-interest rate environment, why opt for a high-cost funding source instead of lower-cost alternatives?

AA: It's important for us to maintain a balanced mix of debt and equity for long-term sustainability. This strategy ensures that we are not overly reliant on one source of funding and can navigate various financial environments effectively.

By having this mix, we can better manage risks and maintain our financial stability over time.

MG: BFAL currently has no long-term debt. Will the company consider leveraging debt for future expansions instead of further equity dilution?

AA: Yes, it's definitely a possibility. We can consider taking on debt in the long term if it aligns with our strategic goals. This approach would allow us to fund future expansions while maintaining a healthy balance between debt and equity, ensuring sustainable growth for the company.

Financial Performance

From FY22 to FY24, the company demonstrated exceptional financial performance, achieving remarkable growth across key profitability, growth, and leverage metrics. Revenue surged at a compound annual growth rate (CAGR) of 56.7%, rising from Rs2.4 billion to Rs6.1 billion over the last three years, while net profit increased by a CAGR of 66% over the same period, reaching Rs380 million by FY24.

Moreover, the Company has already reported a net profit of Rs211m in first quarter of FY25.

Despite challenges such as a high interest environment in FY23, the company maintained stable gross and operating margins, with a net profit margin of 6% by FY24.

Additionally, its return on equity (ROE) improved from 46% in FY23 to 50% in FY24, and return on assets (ROA) rose from 18% to 22%, highlighting the company's efficient use of assets.

The company's financial stability was further underscored by a reduced debt-to-equity ratio, which improved significantly from 211% in FY22 to 60% in FY24, showcasing a stronger equity base and reduced reliance on debt.

Concerns/Risks

Though the interview with the CEO provided clarity but also raised a few concerns. The claim of generating positive cash flow from operations compared to the previous year is a positive development. However, relying heavily on credit sales without adequate risk mitigation strategies could lead to significant liquidity challenges, especially if customers delay payments or if there are unexpected changes in market conditions.

Pertaining to the conversion of the loans into equity, the CEO said that it was to meet PSX's minimum capital requirements and enhance financial health before the IPO. This suggests that the company may have faced pressures to improve its financial appearance.

While the CEO's optimism about the growth in export share is commendable, the response lacks specificity and depth. The increase from 10% to 15% in export sales is a positive sign, but the CEO did not provide detailed information about the actual margins achieved in international markets.

The CEO's explanation for the projected 66% CAGR in net profit is clear, but it lacks concrete data. The new production facility and anticipated freight cost savings are positive developments. However, relying on increased production capacity and export demand may be overly optimistic. These projections assume a seamless transition and immediate market uptake, without accounting for potential market fluctuations, competition, or operational challenges.

The CEO acknowledged the challenges of market penetration and the need for educating customers about the benefits of their products. However, a more detailed strategy could enhance this effort.

Conclusion

The company offers a unique and compelling opportunity in the food processing industry, leveraging its monopoly in the pasteurized egg market, strategic expansion plans, and commitment to innovation.

However, achieving its ambitious targets will demand meticulous execution, effective risk management, and continuous adaptation to market conditions. While the company's vision is promising, sustained success will hinge on its ability to balance growth with operational efficiency, mitigate risks, and navigate potential challenges.

Final Word: Make a savvy choice with all the facts at your fingertips.

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. Readers should conduct their own research and consult a financial advisor before making any investment decisions.

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