FCEPL’s revenue growth suggests further upside for share price

November 29, 2023 (MLN): FrieslandCampina Engro (PSX: FCEPL) has managed to maintain volumes despite aggressive price hikes, which, coupled with new product introductions, drove robust revenue growth, suggesting that there is still potential for further upside in its share price.

As per a research report by EFG Hermes Pakistan, a Pakistan Investment Brokerage, FCEPL’s impressive earnings momentum is likely to continue to drive the share price upwards.

It has also consistently outperformed its key peer (Nestle) in terms of sales growth, and its declining debt means there is scope for the resumption of dividends, the report noted.

“We expect a margin recovery and lower finance costs to drive its 2024E EPS up by 74% YoY, which should continue to drive the share price over the next 12 months.” EFG Hermes added.

Amount in PKR Billion (G)

Dairy Sector

The overall dairy sector, which includes Nestle Pakistan Limited (PSX: NESTLE), Fauji Foods Limited (PSX: FFL), and FCEPL has been relatively resilient despite the macro headwinds.

Trailing 12 months earnings before interest and taxes (EBIT) stood at $153 million as against $74m in 3Q19; FCEPL’s EBIT has improved from a loss of $4m to $20m over the same period as well.

The report noted that the sector has recovered strongly as a result of improving consumer perception about dairy while following a more rational pricing approach.

FCEPL has been the key beneficiary of this trend, which has been helped by its on-going new product rollouts, including flavored milk, cream, milk powder, etc.

FCEPL’s share of sector revenue has risen from a low of 20% in 2018 to 30% at the end of 2022 and 31% as of September 2023.

“This effective execution gives us more conviction on FCEPL’s ability to grow sustainably.” it highlighted.

Dairy Sector Companies and KSE100 5Y Performance

FCEPL and KSE100 YTD Performance

Outlook

FCEPL is likely to end 2023E with an EBIT margin of 5% compared to. 6.1% last year.

As per EFG Hermes, the EBIT margin could recover to c5.8% in 2024E, given product price increases and strong cost control.

Furthermore, 3Q23 net debt stood at Rs5.4bn, which incorporates elevated inventory days, I.e. 80 days as against its five-year average of 40 days.

Management had stocked up as it was wary of the risk of supply chain disruptions, but as this normalizes, EFG expects FCEPL to become net cash in 2024E, potentially leading to a c70% decline in interest expenses.

The report added that they expect this margin improvement and declining interest costs to be the key drivers of their 74% YoY EPS growth forecast for 2024E.

This would imply that FCEPL is trading at 7.8x 2024E EV/EBITDA as against its three-year average of 13.9x.

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