MATCO

FOODS

LIMITED

DEC- 2018

INVESTMENT HYPOTHESIS

• Favorable global dynamics to drive earnings growth in conventional rice

business

• Expansion in rice glucose segment to expand margins going forward

• Further diversification into Maltodextrin to add value

Market Price Rs27.56 Target Price(Jun 2019) Rs40 Upside 45.14%

Free Float (m) 46.63Shares Outstanding Shr. (m) 122.4 shares Market Cap (m) Rs3,373.34 Market Cap (m) $24.27 52 week High Rs45.19 52 week low Rs25.32 Daily Volume(1-year) 1.9m shares

Net Asset per share Rs36

Matco Foods Limited – Investment Hypothesis Matco Foods (UC)

Income Statement

In '000(except where indicated) 2018 2017 2016 2015 2014 2013

Sale 6,869,392 6,134,425 5,577,876 6,088,890 8,159,997 6,289,407

Cost of sale (5,862,040) (5,169,061) (4,939,057) (5,193,912) (7,279,257) (5,440,518)

Gross profit 1,007,352 965,364 638,820 894,978 880,740 848,889

Districution Expense (300,137) (291,889) (284,255) (273,849) (338,457) (296,929)

Administration expenses (198,099) (175,232) (158,891) (165,778) (131,536) (106,109)

Finance cost (239,704) (211,905) (203,749) (294,055) (332,690) (245,100)

Other Income 17,850 36,617 17,958 2,406 9,355 1,969

Exchange Gain 72,858 34,999 32,647 1,082 173,675 (2,188)

Profit before tax 337,789 342,045 37,948 159,880 254,440 195,533

Taxation (29,460) (73,076) (34,032) (62,104) (77,383) (64,690)

Profit after tax 308,329 268,969 3,916 97,776 177,057 130,842

EPS 2.64 2.31 0.03 0.84 1.52 1.12

Gross profit margin 14.66% 15.74% 11.45% 14.70% 10.79% 13.50%

Distribution Expense 2.88% 2.86% 2.85% 2.72% 1.61% 1.69%

Administration Expense 2.88% 2.86% 2.85% 2.72% 1.61% 1.69%

Effective tax rate 8.72% 21.36% 89.68% 38.84% 30.41% 33.08%

Net profit margin 4.49% 4.38% 0.07% 1.61% 2.17% 2.08%

13 20 27 3 10

September

17 24 2

October

8 15 22 29 5

Nov ember

12 19 26 3

December

10

24.0

24.5

25.0

25.5

26.0

26.5

27.0

27.5

28.0

28.5

29.0

29.5

30.0

30.5

31.0

31.5

32.0

32.5

33.0

33.5

34.0

34.5

35.0

35.5

36.0

36.5

37.0

37.5

38.0

38.5

39.0

39.5

40.0

40.5

41.0

41.5

42.0

42.5

43.0

43.5

24.0

24.5

25.0

25.5

26.0

26.5

27.0

27.5

28.0

28.5

29.0

29.5

30.0

30.5

31.0

31.5

32.0

32.5

33.0

33.5

34.0

34.5

35.0

35.5

36.0

36.5

37.0

37.5

38.0

38.5

39.0

39.5

40.0

40.5

41.0

41.5

42.0

42.5

43.0

43.5MFL (28.0900, 28.3700, 27.2000, 27.5600, -0.49000)

• Global rice consumption has grown steadily from 437MnTons in 2009 to 480MnTons in 2018. Rice consumption is expected to grow to 570MnTons by 2025 • Countries in Asia are the world’s largest producers and exporters with India being the top exporter specially to the EU where it meets around 80% of the region’s demand • In January 2018, a ban was imposed by EU on rice imports from India due to presence of higher levels of tricyclazole pesticide in Indian basmati rice which were found to be 10x more than the acceptable level of 0.01 mg per kg. This has put Pakistan at a sweet spot as Pakistan does not use this pesticide. It is our understanding that it could take India at least 2-3 crop cycles to bring the level of tricyclazole pesticide down to an acceptable mark • Pakistan exported $2.04Bn worth of rice in FY18 ($0.58Bn Basmati and $1.45Bn IRRI) compared to $1.6Bn in FY17 ($0.45Bn Basmati and $1.15Bn IRRI). Exports in FY18 were highest since FY15 • We further understand that following EU’s footsteps, Saudi Arabia is also looking to reduce Indian rice imports which have historically met around 78% of the Kingdom’s rice needs while Pakistan was only catering to around 6% of the demand •Primarily brown rice is exported to the EU as there is zero tariff on brown rice imports which are further processed by local European processing units into white rice • We foresee these developments to provide a favorable landscape for Pakistani rice exporters where absence of Indian rice from certain regions will a) help Pakistani exporters to gain and establish foothold in key export markets; and b) keep prices upbeat due to supply restrictions

Rice Consumption (MnTons)

Favorable global dynamics drive higher earrings

0

5,000

10,000

15,000

480 476

469 475 474

463 460

445 438 437

410

420

430

440

450

460

470

480

490

18 17 16 15 14 13 12 11 10 9

Rice Export (MnTons)

Rice Import (MnTons)

- 5,000 10,000 15,000 20,000

Africa

Asia

Middle East

East Asia

European Union

America

Caribbean

Other

Source: USDA Foreign Agricultural Service

Source: USDA Foreign Agricultural Service

Source: USDA Foreign Agricultural Service

MATCO FOODS - # 1 Basmati Rice Exporter

• Matco Foods Limited is one of the largest premium quality rice exporters in Pakistan with over 7% share in the overall basmati rice exports of the country in FY18 • Company’s current sales mix constitutes 88% basmati rice and 12% IRRI, out of which 93% of the basmati variety is exported • Matco has increased its rice processing capacity multiple times in the last 6 years taking it from 96.9Mn Tons in FY13 to 134.7Mn Tons in FY18. Current utilization levels stands at around 69.9% in FY18 • Matco’s flagship brand ‘Falak’ constitutes 25% of the rice sales mix and offers a higher margin of around 20% - the company is focused on increasing share of Falak in their sales mix • We expect the company’s utilization levels to edge up going forward as more concentration will be on brown rice production (EU factor) which has a higher yield (lower byproducts). Based on our understanding of the rice production process, the various stages from paddy to white rice creates at least 50% by-products i.e. husk, broken rice etc. Brown rice is produced somewhere in the middle of this process thus lower by-products and higher utilization levels • We further expect the company’s margins from the rice business to remain around ~14% as historically even in times of higher international rice prices there has been no expansion in margins • We estimate Matco’s rice earnings to be in the region of Rs3.20 /share at 75% utilization levels (Rs6.05/share at 100% utilization)

8.41

3.81

3.07

2.49

1.79

1.77

1.72

Australia

Netherland

UK

UAE

France

Portugal

USAExport Sale

$Mn

-

50

100

150

FY13 FY14 FY15 FY16 FY17 FY18

Rice Capacity Rice Processed

*Rs3.7Bn of Export Sales

Rice Glucose Expansion, Production of Maltodextrin to increase margins

• Matco is currently focusing towards increasing its exposure in value added products by expanding its current capacity of Rice Glucose and Rice Protein. This is in line with global preferential shift from corn based syrup to rice based syrup which is considered a healthier alternative • In case of Rice glucose current capacity of 10,000tpa is being expanded to 30,000tpa and current capacity of Rice Protein is being expanded from 1,000tpa to 3,000tpa – both these are expected to come online by June 2019 • Domestic demand (Rice Glucose and Corn Glucose) is estimated to be around 220,000tpa, of which 60,000tpa is from Pharma and Confectionery businesses. The market for glucose, dextrose, and maltodextrin in US only , in terms of value, is estimated at $34.47Bn in 2018, and is projected to reach $51.87Bn by 2024, at a CAGR of 7.0% • As per our understanding, from the current capacity of 10,000tpa of rice glucose 8,000 tpa is the effective capacity and the company is utilizing it entirely. In terms of Sales mix exports of the company are expect to reach a run rate of around 150 tons/month, with the rest of the output being sold in the domestic market • Differential in margins from export sales and local sales is significant as almost 30% higher price is fetched from international sales compared to local sales – the company is focusing on shifting current sales mix of rice glucose towards exports and expects to increase share of export sales in due course of time • The company is also in the process of setting up a plant of Maltodextrin (a processed product of Rice Glucose) of 5tpd (expected completion in June 2019)– this is used in soft drinks, candies and non-dairy creamers • We foresee share of higher margin products to increase in the overall sales mix of the company in the future which will impact the margins favorably

• We expect MFL to post FY19E , FY20E and FY 21E of around Rs3.59/share , Rs6.11/share and Rs8.28/share • MFL is currently trading at a forward multiple of 7.68x, 4.51x and 3.33x FY19E , FY20E and FY 21E estimated earning • We have a Buy stance on MFL with June-19 Target of Rs40

Valuation MFL (000) FY19-E FY20-E FY21-E FY22-E FY23-E FY24-E

Sales 11,095,117 13,525,963 14,897,290 16,289,964 17,719,674 19,335,480

Cost of Sales (8,890,416) (10,157,758) (11,221,324) (12,258,194) (13,635,321) (15,062,731)

Gross Profit 1,683,821 2,261,193 2,691,257 3,091,673 3,473,771 3,975,625

Profit After Tax 418,192 712,308 965,639 1,173,742 1,366,908 1,634,927

MFL EPS (Rs) 3.59 6.11 8.28 10.07 11.73 14.03

Gross Profit 15.2% 16.7% 18.1% 19.0% 19.6% 20.6%

Net Profit 3.8% 5.3% 6.5% 7.2% 7.7% 8.5%

Rice (000) FY19-E FY20-E FY21-E FY22-E FY23-E FY24-E

Process Capacity 134,700 134,700 134,700 134,700 134,700 134,700

Production 70,718 75,432 80,147 84,861 89,576 94,290

Production Capacity(%) 8% 7% 6% 6% 6% 5%

Sales 10,389,077 11,414,132 12,491,341 13,622,910 14,811,130 16,058,383

Cost of Sales (8,849,416) (9,722,558) (10,640,124) (11,603,994) (12,616,121) (13,678,531)

Gross Profit 1,539,661 1,691,574 1,851,217 2,018,915 2,195,009 2,379,852

Distribution Expense (492,442) (541,030) (592,090) (645,726) (702,048) (761,167)

Administration expenses (297,128) (326,444) (357,252) (389,615) (423,598) (459,270)

Finance cost (250,518) (237,600) (204,600) (204,600) (204,600) (204,600)

Profit Before Tax 499,574 586,500 697,275 778,974 864,764 954,815

Tax (149,872) (175,950) (209,182) (233,692) (259,429) (286,445)

Profit After Tax 349,702 410,550 488,092 545,282 605,335 668,371

EPS (Rs) 3.00 3.52 4.19 4.68 5.19 5.73

Glucose/Protein etc. (000) FY19-E FY20-E FY21-E FY22-E FY23-E FY24-E

Process Capacity 30,000 30,000 30,000 30,000 30,000 30,000

Production 8,000 24,000 24,000 24,000 24,000 24,000

- Export Glucose 1,800 5,600 8,000 10,000 11,000 13,000

- Local Glucose 6,200 18,400 16,000 14,000 13,000 11,000

Sales 706,040 2,111,831 2,405,949 2,667,054 2,908,544 3,277,097

Cost of Sales (41,000) (435,200) (581,200) (654,200) (1,019,200) (1,384,200)

Gross Profit 144,160 569,618 840,040 1,072,758 1,278,762 1,595,772

Distribution Expense (9,336) (40,845) (52,515) (58,350) (87,526) (116,701)

Administration expenses (4,244) (18,566) (23,871) (26,523) (39,784) (53,046)

Profit Before Tax 152,428 411,049 506,834 554,727 794,190 1,033,653

Tax (45,728) (123,315) (152,050) (166,418) (238,257) (310,096)

Profit After Tax 68,491 301,757 477,547 628,460 761,573 966,556

EPS (Rs) 0.59 2.59 4.10 5.39 6.53 8.29

• Disclaimer REP-091

Disclaimer: This document is prepared for information purposes only. The information and data on which this report is based are obtained from sources which we believe to be reliable but we do not

guarantee that it is accurate or complete. This document does not take account of the investment and trading objectives, financial situation and particular needs of clients, who should seek further

professional advice or rely upon their own judgment and acumen before making any investment / trading decision.

• Analyst Certification

The author(s) of this report hereby certifies(y) that this report accurately reflects his/their own independent opinions and views as of the time this report went into publication and that no part of his/their

compensation was, is or will be affected by the recommendation(s) in this report. The research analyst or any of his/their close relatives do not have a financial interest in the securities of the subject company

aggregating more than 1% of the value of the company and the research analyst or their close relatives have neither served as a director/officer in the past 3 years nor received any compensation from the

subject company in the past 12 months. The Research analyst or his/their close relatives have not traded in the subject security in the past 7 days and will not trade for 5 days post publication of the report.

• Valuation Methodology

To arrive at period end target price, Abbasi Securities uses different valuation methodologies:

· Comparable Method ( P/E, P/B etc.)

· Discounted Cash flow Method

-Sum of the parts {SOTP}

·Equity and Asset based valuation

• Rating

– BUY Total return more than 20% from last closing of market price

– HOLD Total return is in between 10% and 20% from last closing of market price

– REDUCE Total return is less than 10% from last closing market price