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Pakistan Consumer: Profitability up 24% YoY in Dec 2017

• Pakistan consumer companies (Staples & Discretionary) recorded profitability growth of 24% YoY (excluding outliers) in Dec 2017 thanks to strong performance from Staples. Our analysis is based on sample of listed firms with market capitalization of US$200mn and above. For our Dec 2017 profitability analysis, we have excluded Engro Foods (EFOODS), National Foods (NATF), Packages (PKGS) and Thal Limited (THALL). EFOODS and NATF posted loss in 4Q2017 while PKGS had substantial increase in its earnings due to a one-off gain recognized on revaluation of its subsidiary, Bulleh Shah Packaging. THALL on the other hand had higher base effect owing to one-time gain on disposal of investment in Metro Habib Cash & Carry Pakistan (MHCCP) in 4Q2016.
• In 4Q2017, Pakistan consumers posted revenue growth of 22% YoY (Staple sales up 12% YoY, Discretionary sales up 34% YoY). To note, we have excluded PKGS from our sales analysis (PKGS sales were up 74% YoY) as the company reclassified Bulleh Shah Packaging as its subsidiary during 2H2017, after buying back 35% stake in the company.
• Staple sector witnessed sales growth of 12% YoY in 4Q2017, mainly led by higher sales from Tobacco companies (PAKT & PMPK). In our staple space (excluding PKGS), PMPK and PAKT recorded highest sales growth of 68% and 46% YoY during the outgoing quarter thanks to cut in Federal Excise Duty (FED) on cigarettes falling in lower slab in Budget FY18, which led to higher volumetric sales. EFOODS was the only company from our sample, that reported decline in sales (down 24% YoY).
• NATF also recorded excellent revenue growth of 37% YoY in 4Q2017 thanks to its investment in A-1 Bags and Supplies Inc, Canada, through its wholly owned subsidiary National Foods DMCC. A-1 Bags contributed 26% (Rs1.2bn) to NATF’s net sales in 4Q2017.
• Sales of discretionary sector were up by an excellent 34% YoY with PSMC recording highest sales growth of 47% in Dec 2017, followed by 39% growth recorded by HCAR. Stellar growth in revenues of PSMC and HCAR was on the back of strong volumetric sales where PSMC’s volumes were up 34% YoY while HCAR recorded volumetric growth of 43% in 4Q2017 quarter.
• Consumer sector margins during the outgoing quarter contracted by 133bps to 23% in Dec 2017 mainly due to decline in margins of discretionary firms (down 252bps YoY to 13%). In staples, only three companies (NESTLE, BATA and RMPL) managed to improve their margins where NESTLE’s margins were up by a significant 448bps to 36%.
• Staples sector posted profitability growth of 36% YoY in 4Q2017 thanks to strong performance from NESTLE (earnings up 63% YoY), PAKT (earnings up 35% YoY), BATA (earnings up 35% YoY), and PMPK (profit of Rs112mn vs. loss of Rs84mn last year). In discretionary, only INDU reported growth in earnings (up 23% YoY).