IPO anniversary: A year on, Engro Foods wins over the sceptics

Company now has a larger market capitalisation than its parent conglomerate.

KARACHI:

If you had invested Rs100,000 in the Engro Foods initial public offering (IPO) last year, you would have had Rs273,640 if you had held on to the stock till the close of trading on the Karachi Stock Exchange (KSE) on Monday.

That translates into a 174% return over the past year. As the Engro Foods IPO turns one year old, many analysts who had hitherto been sceptical of the company and its valuation have since come around to viewing the stock more positively.

At the time of its IPO, many market participants had voiced concern that the issue was being priced too high. The listing price of Rs25 per share was more than 25 times what were then the projected 2011 earnings of the company, a steep premium over what was then the prevailing market price-to-earnings ratio of less than eight. Many asset managers who spoke to The Express Tribune then said they would buy a limited number of shares. Analysts at KASB Securities, widely regarded as the most respected research team in the country, was at best lukewarm to the issue.

But it seems that the sceptics were wrong, and that the Engro executives were right when they insisted that the price would skyrocket once the lock-in periods for the foreign investors expired. The stock started trading at Rs25 per share on August 11, 2011 and has since skyrocketed, closing at Rs68.41 per share on Monday, August 13, 2012.

Engro Foods has handily outperformed the broader stock market. During the period that the stock has yielded 174%, the benchmark KSE-100 index has gone up 32.4%, a respectable show, but nonetheless much less than the returns earned by the few who believed in Engro Foods enough to buy it at the IPO and stick with the stock for the year.

This performance goes beyond even the wildest expectations of even the most optimistic of analysts. JS Global Capital and BMA Capital had both been bullish on the stock, but neither had predicted more than a 60% 12-month gain from the IPO price. As a result, even the sceptics at KASB now appear to have a more positive outlook on the stock, calling it “the most liquid play on consumer spending in Pakistan.”

At these levels, however, many analysts, especially those at AKD Securities, appear to feel that all of the positive news about the company has already been priced into the stock, which is currently trading at 28 times estimated 2012 earnings.

The outstanding performance of the company stands in sharp contrast to that of its parent conglomerate – Engro Corporation. The divergence between the two can be gauged by a single statistic: over the past month, Engro Foods has had a higher market capitalisation than its parent company for 20 of the past 25 trading days.

Over the past year, investors in Engro Corporation have lost about 10.9% of their money, largely due to losses at the conglomerate’s fertiliser business, which has faced prolonged shut-downs of its $1.1 billion urea manufacturing unit – the Enven plant, owing to a nationwide shortage of natural gas, the raw material needed to produce urea. With election season around the corner, there appears to be no end in sight for the gas crisis in the country.

Engro Fertilizers still has the greatest potential to earn revenues and profits for the conglomerate, but Engro Foods appears to be unencumbered by a reliance on government largesse. (Engro Fertilizers gets its natural gas at a very heavily subsidised rate of $0.75 per million British thermal units (mmbtu), compared to the prevailing international price of liquefied natural gas of around $18 per mmbtu.)

Published in The Express Tribune, August 14^th, 2012.