Financials

NATF AT A GLANCE Profit and Loss Account

FY15 FY16 FY17 FY18 FY19
Key Highlights
Net Sales 11,692,786 13,569,350 16,781,813 21,591,559 24,253,797
Cost of Sales (7,558,786) (9,073,765) (11,382,955) (14,887,820) (17,269,476)
1. Positive Trend in Local Sales, growing at a CAGR Gross Profit 4,134,000 4,495,585 5,398,858 6,703,739 6,984,321
of 12.20% (2015-19) Distribution Costs (2,160,654) (2,682,631) (3,444,333) (4,138,503) (3,920,912)
Administrative Expenses (472,034) (521,821) (520,462) (913,220) (1,140,774)
Impairment Loss - - - (106,149) (33,402)
2. Soaring sales from A-1 Bags & Supplies growing Other Operating Expenses (122,306) (99,217) (109,287) (230,198) (131,112)
at a CAGR of 112.35% over past 2 years Total Operating Expenses (2,754,994) (3,303,669) (4,074,082) (5,388,070) (5,226,200)
1,379,006 1,191,916 1,324,776 1,315,669 1,758,121
Other Operating Income 99,509 32,694 98,997 53,467 248,281
3. Strong Operating Cashflows growing at a CAGR of
Profit from Operations 1,478,515 1,224,610 1,423,773 1,369,136 2,006,402
33% between 2015-19 Finance Costs (44,669) (89,143) (104,817) (195,728) (283,506)
Profit before Taxation 1,433,846 1,135,467 1,318,956 1,173,408 1,722,896
Taxation (438,690) (338,277) (345,666) (146,374) (352,381)
4. Improved Efficiency due to Cash Conversion Cycle Profit after Taxation 995,156 797,190 973,290 1,027,034 1,370,515
falling by 30 days over the past 5 years
Source: Company Financials

Key Ratios
5. Flexible Capital Structure due to 12.4% utilization FY15 FY16 FY17 FY18 FY19

of Authorized Share Capital which is PKR 5 billion P/E 35.37 36.52 29.46 32.75 17.67
EPS 6.67 5.34 6.52 6.88 9.19
EPS Growth 12.86% -19.89% 22.09% 5.52% 33.44%
6. Aggressive CAPEX in recent years due to Debt to Equity 0.00% 0.00% 11.06% 4.98% 18.45%

investments in A-1 and Local Expansion Dividend Yield 2.94% 0.98% 1.57% 1.30% 2.17%

Source: Company Financials

 National Foods Limited

National Foods
Presented By:
The Spice Warriors
Limited
Presented By: The Spice Warriors
Date: 4th February 2020
Two Product Divisions

Food

40% 60%

Kitchen
Source: Company Financials, Team Analysis
Competitors – Food Division
Domestic Market Share

68% 54%

Pickles Jam

Ketchup Dessert

64% 17%
Source: NATF Kickoff Presentation, Team
Analysis

Versus local competition, National Leads in 3 out of 4 Food Categories

Competitors – Kitchen Division
Domestic Market Share

35% 58%

Basic Spices Recipe Mixes

Salt Snacks

49% 65%
Source: NATF Kickoff Presentation, Team
Analysis

Versus local competition, National Leads in ALL Kitchen Categories

Major Player in PKR 40 Bn Spice Industry
Branded vs Unbranded Segment
100%
10%
Kitchen
90%
80%
70% 60%

75%
60%
Unbranded
50%
Branded 90%
40%
30%
20% 40%

25%
10%
0%
Source: Pakistan Journal Of Agricultural Engineering
International Presence

Source: Company Annual Report

Our Recommendation

Share Price Projection – A Spicy Growth

BUY 300 Story!

PKR 256.20 PKR/Share

250

22% UPSIDE 200

NATF Snapshot
Shares Outstanding (Mn) 149 150

Market Cap (PKR Mn) 36,702

Free Float (Mn) 45

100
FY15A FY16A FY17A FY18A FY19A FY20E
Source: PSX, Bloomberg, Team Analysis
Reasons to Buy NATF

1 Sustained Increase in Local Demand

2 Positive Growth Trends in Foreign Markets

3 Enhanced Long-Term Profitability

Reasons to Buy NATF

1 Sustained Increase in Local Demand

2 Positive Growth Trends in Foreign Markets

3 Enhanced Long-Term Profitability

1. Sustained Increase in Local Demand
Local Sales Projections
45000

40000

35000
42.7 Bn
FY2024 Forecasted
30000
Local Sales
PKR (Mn)

25000

20000 12.32%
15000 Sales CAGR
10000
FY2019 - FY2024
5000

0
FY15A FY16A FY17A FY18A FY19A FY20E FY21F FY22F FY23F FY24F
Source: Company Financials, Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
1a. Economic outlook to sustain consumer spending

Economic Indicators Current Account Deficit

75% Reduction
(Million US$)

2HFY2019 1HFY2020 Change

Stable PKR/USD
Current Account
Exchange Rate
(8,614) (2,153) -75.01%
Balance
Exports 14,442 15,129 4.76% SBP Target Inflation
5-7% Rate
Imports 32,819 26,742 -18.52%

Monetary Easing
Lower pressure on PKR will increase consumption

Source: IMF, State Bank of Pakistan

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
1b. Demographic Trends to Enhance Demand
Population and Urbanization Trends
250 38.50%

National More Prevalent 38.00%

in Urban Areas 200
37.50%

Urbanization (%)
Population (Mn)
Convenience Trend on 150
37.00%

the Rise 36.50%

100
36.00%
Overall Population
Growth 50
35.50%

35.00%
More Females Entering
0 34.50%
the Workforce

Population (millions) Urban Population

(% of Total Population)
Source: United Nations

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
1c. Regulatory Shift to Amplify Share of Formal Sector
Shift In Sales Mix – Kitchen Segment will grow faster

60%
64%
60% Punjab Food Authority
50% Article 11.1

40%
Regulations to get
stronger
30%
40%
37% Regulations to trickle to
20%
other regions
10%
Kitchen Division FY17A Food Division Weight FY24F
Weight
Linear (Kitchen Division Linear (Food Division Weight)
Weight)

Source: Punjab Food Authority, Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
1d. Competitive Positioning to maintain market share
Market Share by Segment
90%
80%
First Movers Advantage
70%
60%
50%
40% Market Leader in 5 Categories
30%
20%
10% Relatively Strong Customer
0% Loyalty
Basic Recipe Salt Snacks Pickles Dessert Jams Ketchup
Spices Mixes

NATF Others
Source: NATF Kick-off Presentation, Team Survey

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
Reasons to Buy NATF

1 Sustained Increase in Local Demand

2 Positive Growth Trends in Foreign Markets

3 Enhanced Long-Term Profitability

2a. A-1 Cash & Carry has strong growth trajectory
A-1 Cash & Carry Sales to Grow Consistently A-1 Quarterly Decomposition
16000
8000
112%
2017-19 growth
14000
7000

12000
6000

10000 5000
PKR (Mn)

PKR (Mn)
8000 4000

3000
6000

2000
4000

1000
2000
0
FY17A FY18A FY19A FY20E
0
FY17A FY18A FY19A FY20E FY21F FY22F FY23F FY24F Q1 Q2 Q3 Q4
Source: Company Financials, Team Analysis Source: Company Financials, Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
2b. Multiple drivers support exports growth
Exports Projected Growth
3500

Port Qasim Facility 3000

2500

PKR (Mn)
2000
Pakistani Diaspora
1500

1000

International Marketing Efforts

500

0
FY15A FY16A FY17A FY18A FY19A FY20E FY21F FY22F FY23F FY24F
Source: Company Financials, Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
2c. Depreciating rupee outlook supports export stability
PAK/CAD Depreciation 8.55%
Average Annual
180 Depreciation 18.00%

160 16.00%

Currency Depreciation (%)

140 14.00%

120 12.00%
PKR/CAD

100 10.00%

80 8.00%

60 6.00%

40 4.00%

20 2.00%

0 0.00%
FY19A FY20E FY21F FY22F FY23F FY24F

Exchange Rate Currency

PKR/CAD Depreciation Source: IMF, Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
Reasons to Buy NATF

1 Sustained Increase in Local Demand

2 Positive Growth Trends in Foreign Markets

3 Enhanced Long-Term Profitability

 3a. Capacity utilization to improve gross margins

40.00%
Gross Margin Projections

35.00%

30.00% Increased Capacity Utilization

25.00%

20.00%
Increase in Sales of High
15.00% Margin Products
10.00%

5.00% Economies of Scale and

Automation
0.00%
FY15A FY16A FY17A FY18A FY19A FY20E FY21F FY22F FY23F FY24F

Source: Company Financials,Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
 3b. Distribution shift to enhance net margins
Net Margin Projections
9.00%

8.00%

7.00% New Distribution Partner

New Distribution Partners
6.00%
Company Expansion
5.00%
Distribution Expense as % of Sales
4.00%
20.52% 17.32%
3.00%
2017 2024

2.00%

1.00% Infrastructural
Distribution Development
Expense as a % of Sales
0.00%
FY15A FY16A FY17A FY18A FY19A FY20E FY21F FY22F FY23F FY24F

Source: Company Financials,Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
3c. Lean supply chain model will further help keep costs at bay

NFL
Farmers Middlemen Distributors Consumers
Processing

Efficiencies Attained Through Middlemen Roles

Aggregator Procure High Quality Chili

Intermediary

Accredited Farms
Division

No Aflatoxins and meets export quality

Chili Centre Secured Supply Chain

Arif Habib Trading

Maintain Stable Raw Material Cost
Source: Team Analysis, Market Study, Company Information

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
Valuation Methodology

BUY PKR 256.20

30th June 2020

METHODOLOGY

Discounted Cash Flow 22%

----Analysis
UPSIDE
WACC Terminal Growth

PKR 210
13.16% 9.60% 7th January 2020

Source: Bloomberg,Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
Valuation Methodology

WACC 13.16% Terminal Growth 9.60%

Risk Free Rate 11.00% 19.21%

EBITDA CAGR
Beta 0.49 FY2019-2024

Market Risk Premium 6.00% 5%

IMF Projected GDP Growth Rate
Cost of Equity 13.90% FY2024

After-tax Cost of Debt 8.44%

Source: Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
 Dividend Discount Model
Dividend Payout Projections EPS Projections
Basic EPS Dividend Per Share

120.00% 35.00

30.00
100.00%

25.00
80.00%

20.00

42.8%

PKR
60.00%
FY2024 DPO 15.00

40.00%
10.00

20.00%
5.00

0.00% 0.00
FY15A FY16A FY17A FY18A FY19A FY20E FY21F FY22F FY23F FY24F FY15A FY16A FY17A FY18A FY19A FY20E FY21F FY22F FY23F FY24F

Sources: Bloomberg, Team Analysis Sources: Bloomberg, Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
Dividend Discount Model
Summary
METHODOLOGY
PKR
UPSIDE307.57
Dividend Discount Model
(DDM) Analysis
15.10%

COST OF EQUITY TERMINAL GROWTH

IMPLIED PRICE

PKR 241.71 13.90% 9.60%

Sources: Team Analysis Sources: Bloomberg, Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
Relative Valuation
METHODOLOGY METHODOLOGY
EV/EBITDA Multiple P/E Multiple
Relative Valuation
PKR 307.57
Relative Valuation
Industry Average NATF EBITDA Industry Average NATF EPS
EV/EBITDA 2019A P/E 2020E

PKR 2.5
17.2x Billion
26.81x PKR 11.42

IMPLIED PRICE IMPLIED PRICE

PKR 272.74 PKR 306.17

Sources: Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
Investment Risks

Market Risks
High

MR1 | Consumption not increasing as

per anticipation
MR2 | Interest Rate Risk
MR 1 IR 1 MR3 | Foreign exchange risk
MR4 | Taxation Risk
Medium
Impact

MR 4 MR 3
Industry Risks
IR1 | Raw Materials Procurement
MR 2 OR 2 IR2 | Competition
OR 1 IR 2

Operational Risks
Low

OR 3 OR1 | Corporate governance risk

OR2 | Supplier Power Risk
Low Medium High OR3 | Accounting Practice Risk
Probability
Sources: Team Analysis

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
 Monte Carlo Simulation

Stock Price Normal Distribution

14%

±2% Range for WACC

and Terminal Growth
12%

10%
10000 Trials
8%

Buy
6% 55% Recommendation
4%
BUY
2%

HOLD
0%
189 189 215.3 241.5 215.25 241.5

PKR/Share Source: Team Analysis SELL

Valuation Ranges
Share Price Projection by Methodology

DCF
Valuation Methodology

DDM

Multiple
s

180 210 230 280 330 380 430

PKR Price/Share
Source: Team Analysis

All methodologies confirm a buy call with average upside > than 15%

SUSTAINED INTERNATIONAL LONG-TERM VALUATION RISKS &

LOCAL GROWTH EXPANSION PROFITABILITY METHODOLOGY SENSITIVITY
Final Recommendation

• Positive economic outlook

Sustained Local
BUY 1 Growth Outlook
•
•
•
Urbanization Rates
Regulatory shifts
Strong Competitive Positioning

International • A-1 Cash & Carry

22%
UPSIDE
2 Expansion &
Diversification
• Increasing Pakistani Diaspora
• Depreciating Rupee

• Lean Supply Chain

Long-Term
PKR 256.20
3 Profitability
• Change in Distributor
• Infrastructural Changes

Sources: Team Analysis

 Thank You!

The floor is open to Questions

APPENDIX
Recommendation Based on Current Scenario

HOLD PKR 256.20

30th June 2020
METHODOLOGY

Discounted Cash Flow 4.14%

----Analysis
UPSIDE
Brokerage Firm FY19 FY20E
BMA 46,000 55,000
JS 42,000 52,500
Topline 42,500 49,000 PKR 246
MCBAH 44,000 51,457
Pearl 47,800 47,400
2nd February 2020
Average 44,460 51,071
% Change FY19-FY20 14.87%
Source: Bloomberg,Team Analysis
Price to Earnings
25.00
Historic P/E Trend Forward Looking P/E
120.00
20.00

100.00

15.00
80.00

60.00
10.00

40.00
5.00
20.00

0.00 0.00
FY14A FY15A FY16A FY17A FY18A FY19A FY19A FY20E FY21F FY22F FY23F FY24F
Gross Margins and Capex
Gross Margin & PPE Growth Relationship
70.00% 40.00%

35.00%
60.00%

30.00%
50.00%

25.00%

40.00%

Gross Margin
PPE Growth

20.00%

30.00%

15.00%

20.00%
10.00%

10.00%
5.00%

0.00% 0.00%
FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY18A FY19A

Gross Margin PPE Growth

Regulatory Comparison with Turkey

Turkey Milk Industry Analogy

• Milk sector Formalization in 1995

• Ban on sale of loose milk in 2008
• Formal milk production increased 100%
• 10 years later the CAGR for the industry is still 24%

Plants
We can draw similar comparisons for the spice industry in Pakistan and expect
National to grow at 9.60% in Terminal Period
Revenue Estimation – Regression Analysis
𝑻𝒐𝒕𝒂𝒍 𝑳𝒐𝒄𝒂𝒍 𝑺𝒂𝒍𝒆𝒔 = −𝟏𝟎𝟗𝟎𝟖𝟒𝟖𝟒𝟑. 𝟐 + 𝟔𝟓𝟗𝟏𝟕𝟕. 𝟔𝟒𝟒 𝐴𝑣𝑔. 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑖𝑛 𝑚𝑖𝑙𝑙𝑖𝑜𝑛𝑠
Total Export Sales (000s) = -5611 + 184*Annual Exports of Spices (PKR Mn)
Regression Statistics
Regression Statistics Multiple R 0.97836083
Multiple R 0.996973037 R Square 0.957189913
R Square 0.993955236 Adjusted R Square 0.951838653
Adjusted R Square 0.992444044 Standard Error 91985.80357
Standard Error 397403.2575 Observations 10
Observations 6 RESIDUAL OUTPUT TOTAL EXPORT SALES
Observation Predicted Y Residuals % of variance
RESIDUAL OUTPUT TOTAL LOCAL SALES 1 445451.0002 48392.99983 10.86%
Observation Predicted Y Residuals Residuals % 2 628522.4904 -30644.49036 -4.88%
3 740276.9743 -14723.97433 -1.99%
1 12,441,147 - 345,439 -2.78%
4 818211.0224 85.97763525 0.01%
2 14,860,329 228,785 1.54% 5 1211741.204 -197530.2036 -16.30%
3 17,289,399 512,023 2.96% 6 1103662.854 74691.14604 6.77%
4 19,725,060 - 173,347 -0.88% 7 1200528.994 68888.00615 5.74%
5 22,164,018 - 378,577 -1.71% 8 1496090.195 -60974.19488 -4.08%
6 24,626,046 156,555 0.64% 9 1551783.63 105312.3699 6.79%
10 1623100.636 6502.363637 0.40%
WACC Calculation
WACC

Weights
Punjab Food Authority Regulations

Sr.No Banned Commodities

1 Monosodium Glutumate
2 Chooran
3 Gutka
4 Shellac E 904
5 Carmine E-120 (color)
6 Partially hydrogenated vegetable oil as a product and as an
ingredient thereof in any food from July 2020 onwards
7 Dairy Drink from 05-12-2018 onwards
8 The use of waste oil and rendered animal fat for any purpose
other than biodiesel production is banned
9 Calcium Carbide as a ripening agent
10 Sale of loose spices from Jan 2019
11 Sale of loose oil and fats
Market Dynamics

Production Price Volume Value Volume Value

Category Company
(Tons) Index Share (%) Share (%) Growth (%) Growth (%)

National
Premium Shan
Priced Habib 12632 100 94% 95% 10% 12%
Brands
Mehran
Maa
Economy
903 50 6% 5% 15% 14%
Brands Regional

Loose
Unranded NA 40-50 NA NA NA NA
Spices
Competitive Positioning by Segment
Tax Regime
Future Corporate Tax Rates

Tax Year Rate of Tax

2019 29%
2020 28%
2021 27%
2022 26%
2023 onwards 25%

Turnover Tax

Turnover Rate
Income attributable to turnover exceeding Rs.250 25% plus
million but does not exceed Rs.350 million

Income attributable to turnover exceeding Rs 350 30% plus

million but does not exceed Rs 500 million

On the income attributable to turnover exceeding 35% plus

Rs 500 million
Corporate Governance

FIGURE 23:Corporate Governance Score Sheet

Board of Directors
4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

HR & Remuneration Committee Audit Committee

Key Financial Ratios
Key Macroeconomic Assumptions

ACTUAL FORCASTED
Macroeconomic Factors 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Population (millions) 186.2 189.9 193.6 197.3 201.0 204.7 208.6 212.5 216.5 220.5 224.7
% Change 2.0% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9%
Real GDP (%) 4.1% 4.1% 4.6% 5.2% 5.5% 3.3% 2.4% 3.0% 4.5% 5.0% 5.0%
% Change 0.0% 12.2% 13.0% 5.8% -40.0% -27.3% 25.0% 50.0% 11.1% 0.0%
Inflation (%) 8.6% 4.5% 2.9% 4.9% 3.9% 7.3% 13.0% 8.3% 6.0% 5.0% 5.0%
Urban Population
35.8% 36.0% 36.2% 36.4% 36.7% 36.9% 37.1% 37.3% 37.5% 37.7% 38.0%
(% of Total Population)
% Change 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6%
Source: IMF and World Bank
Pro Forma Income Statement
Subsidiaries
Company Country Ownership Description

National Foods UAE 100% National Foods DMCC (NF DMCC) was registered on 7
DMCC November 2012 in Dubai Multi Commodities Centre (“DMCC”)
operates in the UAE. The Primary objective of NF DMCC is to
boost export salesfor its parent company. NFDMCC has two
wholly owned direct subsidiaries: National Epicure Inc and
National Foods Pakistan (UK) Ltd.

National Foods UK 100% National Foods Pakistan (UK) Limited was incorporated in
Pakistan (UK) Ltd. United Kingdom on 29 May 2013 as a private company.

The company is engaged in the trading of food products.

National Epicure Canada 100% National Epicure Inc. ("NEI") was incorporated in Canada on 16
Inc October 2013 under the Canada Business Corporation

Act. The company is also engaged in trading of food products.

A-1 Bags and Canada 60% National Epicure Inc. acquired 60% holding in A-1 Bags and
Supplies Inc. Supplies in the year 2017 and is responsible for the

distribution and wholesale of food products, disposables and

sanitation products.
Plants
Facility Name Products Produced

Gujranwala Plant Recipe Packing Line

Salt Packing Line

Ketchup

Carton Packing

SITE Mayo

Ketchup

Chinese Sauces

Port Qasim Carton Packing

Pickles Line

Mango Cutting Line

Snacks (Scene On)

Nooribad Salt Processing Line

Source: Company Data