Karachi, September 11, 2023 (PPI-OT): Food sector - Sales remain strong, dividends continue to pile
Taking a proxy of 8 listed food companies given in the table, we analyse food sector's performance during 2QCY23. Top-line for the quarter remained steady on sequential basis, likely over higher unit prices, offsetting limited volumetric sales. Inflationary pressures took a brunt on sector this quarter with sequential decline in margins, hence lower QoQ profits.
Correlating topline to CPI and food inflation, the food sector's topline growth pace had been much higher than the latter till 1QCY23. This quarter has been an exception where it would be interesting to track whether volumetric and pricing movement would exceed food inflation in the coming quarters.
We, however, highlight, 1QCY23 base was set at record-high levels. Taking a look at the YoY trend, 2QCY23 sector's profits expanded 69% YoY largely owing to a high 38% YoY sales growth and YoY expanding margins.
Companies with major foreign shareholding continued lower dividend payout compared to historical trends. Apparent reason for the same appears to be delays in repatriating profits to parent companies. This also reflected in increasing dividend payables/unpaid dividends for companies with higher foreign shareholding who continue to announce regular dividends.
Food companies witness stable revenues
Taking a proxy of 8 listed food companies given in the table, we analyse food sector’s performance during 2QCY23. Almost half of the contribution comes from three companies that are broadly milk producers (NESTLE, FCEPL and FFL), while remaining are a mix of confectionary, ready-made food items and other food trading segments.
Top-line for the quarter remained steady on sequential basis, which we believe was a result of higher unit prices, offsetting limited volumetric sales. Our thesis is based on ongoing higher food inflation, with limited/negative economic growth persisting in the country. Correlating topline to CPI and food inflation, the food sector’s topline growth pace had been much higher than the latter till 1QCY23. This quarter has been an exception where it would be interesting to track whether volumetric and pricing movement would exceed food inflation in the coming quarters.
Inflation takes a hit on sequential margins
Inflationary pressures and higher commodity prices took a brunt on sector this quarter as most food companies were not able to pass on the cost impact to end consumers. Gross margins trimmed 100bp QQ to 26%. 14%20%30%34% Also, higher fuel costs and distribution expenses led to operating margin contraction of 220bp QoQ to 14%. With operating profits also recording an absolute decline of 13% QoQ, the 27% QoQ higher finance cost over rising interest rates led to reducing interest coverage ratio from 7.6x to 5.2x. Higher taxation with Super Tax charge on some companies took a toll on sector’s tax expenses as well, expanding the cost head by 51% QoQ. As a result, bottom-line contracted by 24% QoQ.
Trend remains upwards
We, however, highlight, 1QCY23 base was set at record-high levels. Taking a look at the YoY trend, 2QCY23 profits expanded 69% YoY largely owing to a high 38% YoY sales growth. Also, compared to 2QCY22, gross margins and operating margins, both, expanded ~100bp YoY, leading to +40% YoY growth in both profit levels. The impressive YoY bottom-line expansion clocked in despite 2x YoY higher finance cost and 38% YoY higher tax expense. Based on our workings, the sector’s multiples are still at attractive levels where trailing P/S computes to 1x while trailing P/E computes to 14x.
Dividends continue to accumulate
Despite higher profits, companies with major foreign shareholding have continued a lower dividend payout compared to historical trends. The apparent reason for the same appears to be delays in repatriating profits to parent companies. This is also reflective for companies with higher foreign shareholding who continue to announce regular dividends, however also report increasing balance of dividend payables/unpaid dividends. NESTLE maintains its payout ratio at 100%+, increasing dividends payable/unpaid dividends to Rs8.7bn (Rs192/share).
Where UPFL had halted dividend announcements since 2QCY22, vis-à-vis historical practice of 100% payout ratio on a quarterly basis, it resumed payout in 2QCY23, albeit with only 25% payout ratio. This has led to the company’s cash and short-term investments to increase to Rs12.4bn (Rs1,946/share, ~9% of market cap), maintaining dividend payable at Rs2.2bn (Rs346/share), other than the one announced with 2QCY23 results.
Also, RMPL has reduced its payout ratio from ~85% in the recent history to ~40% in CY22, and now 33% in 1HCY23. During the same time, its cash and short-term investments have increased to Rs11bn (Rs1,234/share, 15% of market cap).