What is happening at Engro Foods (EFOODS)? The dairy upstart’s performance during the past three years indicates that the once promising new kid at the block has lost all its bearings. First, a financial snapshot.
Since CY15, company’s top line has declined at a CAGR of 13 percent, led primarily by a 42 percent decrease in dairy volume from its peak 552 million litres (CY15). Management blames the downward spiral in dairy volume on a host of factors, from inhospitable regulatory environment; imposition of input tax in CY16; but most importantly, on unfair targeting of its flagship brand by media and courts that led to loss of brand equity in dairy category.
EFOODs stock performance has been indicative of the fall down the well of sadness that refuses to bottom out. The long-term Bull Run that started at the close of CY13 culminated with the announcement of corporate results for 1QCY17. Recall that interest in the scrip was further propped up for most of CY16 thanks to a takeover bid by the Dutch dairy giant, Friesland Campina.
Founding sponsors relinquished management control before the end of CY16 for a hefty price tag of $413 million. Stock price in the immediate aftermath of takeover reflected the stereotypical honeymooning between the new sponsors and ordinary investors. The exuberance even outlasted the announcement of a special dividend of Rs7.6 billion. The first ever cash pay-out by the company saw close to 44 percent of its equity disappear, as part of a capital structure readjustment.
However, announcement of 1QCY17 results showed that dairy volumes had refused to change gears, as if consumers were impervious to the charms of MNC control. Investor sentiment soon lost momentum as well, sending stock price down a spiral that is still searching for rock bottom. During nine-month period between Apr-Dec17, EFOODs lost more than half of its market value, from average Rs160 to Rs75 per share.
Over the past two years, the company has begun to increasingly rely on “gain in fair value of biological assets”, which constitutes most of its other income, to show profit from operations.
During CY17, other income constituted 33 percent of operating profit, which has increased to 123 percent by CY18 close.
While notes to financial statements for CY18 are so far not available, it is notable that “gain in fair value of biological assets” constituted two-thirds of ‘other income’ for CY17.
In CY17, the company had recorded 25 percent gain on opening value of biological assets. If the gain in bovine fair value continues to constitute two-third of other income in CY18 as well, it will have recorded a gain on last year’s opening value of a whopping 64 percent! If only livestock trade was the primary business for the company.
It is only natural that the firm’s new sponsors are not frazzled by its short-term performance.
Market intelligence indicates that Friesland’s entry into the Pakistani market aims to capitalize on the relatively untapped powdered milk and infant formula segment. EFOODs first full year performance post-takeover poses no more than a nuisance to Friesland’s long-term plans for the Pakistani market.
It remains to be seen whether the sponsor’s long-term plans for a turnaround in EFOODS’ fortunes bear fruit, and it is not just the ordinary investor who is taken for a ride.
Comments
Comments are closed.