Fauji Foods Limited Acquisition and Valuation
Prepared By: Anusha Minhaj (12362) Ayesha Asad Noor (12817) Anum Fatima Namdar (12555)
Incorporated in 1966, Fauji Foods Limited, which was About the Company formerly known as Noon Pakistan Ltd. started its humble beginnings from a small village of Nurpur, Sarghoda (Punjab). It was established as part of Noon Group by Pakistani political family Noon family. This Pakistani food company which is known for its dairy products and brands such as Nurpur, and Dostea, is a subsidiary of Pakistani conglomerate company Fauji Foundation..[1] The company is a Public Limited Company and its shares are quoted on Pakistan Stock Exchange Limited. Fauji Foods
currently operates mainly from Lahore, Pakistan.
Fast forward to 50 plus years, House of Nurpur is a brand
that is synonymous with high quality. Today, Fauji Foods
Limited boasts the most extensive product portfolio as
compared to its competitors (Nestle, Engro Foods,
Shakarganj, and Haleeb), being active in chilled dairy,
ambient dairy, juices, and jams.
In April 2015, the Fauji Group acquired 63.4% of Fauji Foods Limited, and then put in place a rigorous growth strategy. This strategy included commissioning of a cutting-edge UHT plant, production portfolio expansion, rebranding, modernization and expansion of milk collection centers with enhancement of the distribution and sales network. As a testament to materializing of this strategy, in 2017 alone, there was an introduction of four new products, namely “Must” Fruit Juices, Nurpur Low Fat UHT Milk, Nurpur Lassi and Nurpur Flavored Milk. These four products added to FFL’s renowned portfolio of Dostea (tea whitener), and the recognizable Nurpur Milk, butter, and cheese line.
REPORT TITLE 2
Nurpur's fortunes were in decline after Prior witnessing a progressive increase in FY12. The main revenue stream for the company Financial was from the sales of its dairy products. The milk company that used to process 43 million Performance liters of milk in FY 10 handled only 18 million liters of milk in FY15. Unlike Engro and Nestle, the giants of the industry which have considerably increased their production, Nurpur was unable to utilize its capacity. The Company witnessed a decline in sales since FY13, and the pattern continued. In FY14 ending June 2014, the company lost 25 percent of its sales. Similarly, in FY15 the decline was 15 percent. In terms of profitability, the company's earnings were mostly negative, and the company posted loss close to Rs 350 million in FY15. It was the third consecutive loss for the business.
Financial year 2012 was particularly beneficial for the company, despite an increase of 10 percent in the price of fresh milk compared to FY11, the company was able to achieve its highest ever production in multiple segments of its production. The company gave credit to its on-going cost controlling and management initiatives that helped offset the negative impact of escalating input costs partially. However, despite this, the company's net margins remained flat. However, after 2012, it has all been downhill for Nurpur.
REPORT TITLE 3
The company management gives three main reasons for their losses. First, they blamed it on the high cost of raw material that has hampered the company's progress; due to cut throat competition in the dairy segment from two giants like Engro and Nestle and NOPK was unable to pass the cost to its consumers. Secondly, the company blamed the economic and political situation of the country responsible for the lack of its sale. The third reason they mentioned in the FY15 annual report was that they were having trouble getting enough financial support from their lenders. ABOUT FAUJI FOUNDATION
Fauji Foundation is one of the largest financial services and one of the largest energy conglomerates in Pakistan, with interests in fertilizer, cement, food, power generation, gas exploration, LPG marketing and distribution, financial services, employment services, and security services.
The group includes many fully owned and associated companies, and one of them is Fauji Foods Limited.
REPORT TITLE 4
Series of Events (Timeline):
• By the end of 2014, Fauji Fertilizer Bin Qasim Limited (FFBL) announced its interest and consideration in potentially buying out Noon Pakistan Limited), the only fertilizer complex in the country producing DAP fertilizer and granular urea, as it planned to venture out in the food processing industry.
Stock Prices Fauji Foods FFBL
Snapshot of stock prices, post the (NOPAK) announcement 1st Dec 2014 38.74 42.26
31st Dec 2014 47.99 45.21
• In February 2015, the board of directors of Fauji Fertilizer Bin Qasim Limited (FFBL) approved the planned acquisition majority shareholding and control of Noon Pakistan Limited, which was announced towards the end of 2014.
• Having obtained the Competition Commission of Pakistan’s no-objection, pre-merger clearance for the acquisition of 24.9 percent voting and 24.9 percent non-voting shares of Noon Pakistan Limited, the board approved the acquisition together with an option to acquire an additional 26.1 percent voting and 26.1 percent non-voting shares when the company forms an intention to acquire majority shareholding and control of Noon Pakistan Limited
• In March 2015, Fauji Fertilizer Bin Qasim Limited (FFBL) and Fauji Foundation, in a public announcement, expressed their intention for a joint acquisition of 51% shares in Noon Pakistan Limited.
Stock Prices Fauji Foods Snapshot of stock price, post the (NOPAK) announcement (2015) 27th March 2015 75.52
REPORT TITLE 5
• FFBL and Fauji Foundation showed interest in acquiring approximately 5,998,212 voting shares of Rs10 each constituting 51% of the issued, subscribed and full paid-up voting shares of Noon Pakistan Limited
• The notice further stated that FFBL and the Fauji Group would acquire 38.25% (4.5 million) and 12.75% (1.5 million) voting shares respectively in the Lahore-based dairy and food company.
• On September 2015, The Fauji Group formally acquired Fauji Foods limited (formerly known as Noon Pakistan Limited)
Stock Prices Fauji Foods Snapshot of stock price, on acquisition date 30th sept 2015 168.71
• News of the acquisition of Noon Pakistan by Fauji Group Limited was taken positively by the investors, shown in the graphs above, in form of a hike in share prices during the acquisition period. Noon Pakistan shares were last traded on July 21, 2016 at a price of Rs 111.02. The year-long transition period marked a price range of Rs 83.30 to a high of Rs 344.52. PERFORMANCE DURING ACQUISITION
Figure 1 Percentage change in price on an annual basis
• During the year the company issued 100,738,598 ordinary shares of Rs. 10 each at a premium of Rs.19.78 per share with voting rights. (Right issue).
REPORT TITLE 6
Stock Prices Fauji Foods Snapshot of stock price, post-acquisition 2 Nov, 2015 366.62
• In May 2016, notice was given to the shareholders that an EGM to be held to consider the change of name of Noon Pakistan Limited to Fauji Foods Limited. Noon Pakistan informed its shareholders that Noon Pakistan Limited intends to change its name to Fauji Foods Limited since Fauji Foundation and Fauji Fertilizer Bin Qasim Limited are major shareholders of the Company. Another incentive as to why the sharehlders agreed to attach the name of Fauji Group with the Company was, it is a bigger market brand having more reliability and acceptability for its customers.
Stock Prices Fauji Foods
Snapshot of stock price, in the following (NOPAK) years Nov 2016 85.07 Nov 2017 19.45
Performance Analysis Pre & Post Acquisition
Performance of Noon Pakistan before the acquisition
Noon Pakistan’s financial statements were deteriorating with progressing years due to increased costs of raw materials and processes. The table below illustrates how the gross margin remained positive, but the net profit margin was taking a hit negatively. This identifies the weakness of Noon Pakistan in not being able to control overheads and operating expenses. Therefore, the problem of decreasing profitability had nothing to do with the sales of the product, rather the management of costs incurred as indirect overheads. This resulted in a loss per share of Rs 3.38 in the year ended December 2015.
REPORT TITLE 7
RATIO COMPARISON PRE & POST ACQUISITION
REPORT TITLE 8
Performance of Noon Pakistan after the acquisition The Company achieved turnover of Rs. 8,094 million in FY18 compared to Rs. 7,000 million in the FY17. Loss after taxation in the 2018 was Rs. 2,849 million as compared to Rs. 2,288 million in 2017. The Loss per Share thereby is Rs. 5.39 as compared with Rs. 9.22 in the comparative year. The increase in net losses are due to higher cost incurred in relation to input costs of raw materials owing
REPORT TITLE 9 to fluctuations in foreign currency exchange rates, and finance costs owing to increase in policy rate by the State Bank of Pakistan.
Moreover, inability of Industry and Company to increase prices of certain products despite increase in its processing cost, including impact of change in Input costs and additional Regulatory Duty and high availability of low-priced loose milk through informal sector also contributed to losses. According to the annual report, the management has undertaken various initiatives like efficient management of input costs, increasing production scales, securing new working capital lines, etc. it is expected that these steps together with increased sales will contribute significantly towards the profitability of the Company in the future.
After the acquisition, FFL had posted a two year (CY16-17) sales compound annual growth rate of 108%. It clearly showed that FFL was expanding quite rapidly in capturing market share in an industry with the likes of NESTLE and EFOODS. In this context, marketing & distribution (M&D) expenses as a percentage of sales for FFL presently exceeded that of established firms i.e. NESTLE & EFOODS, as shown below
Needless to say, market share cannot be captured without significant spending in advertising, marketing and distribution for any new entrant in a competitive environment. Such spending paired with sizeable investments in infrastructure is the primary reason for the losses seen over the past couple of years and is considered quite normal for any new entrant in this industry with an aggressive growth strategy. Here, a subtle point worth noting would be that these expenses should normalize going forward as the company gains market share.
REPORT TITLE 10
The company has reported loss per share amounting to PKR 3.38, PKR 8.75, & PKR 9.22 in CY15,
CY16 & CY17 respectively. In an industry where demand has barely been tapped into, FFL focused on investing heavily in positioning itself to catapult into grabbing a sizeable market share. FMCG firms usually go through a similar phase in the initial years of their business life cycle and show losses in the bottom line. Gradually as market share is captured with sizable volumes the bottom line numbers begin to turn green. Savvy investors understand this particular business model in FMCG business, and value such firms on price to sales basis while monitoring closely their top line growth. Therefore, it would not do justice with FFL if one decides to evaluate it solely on recent financial performance. In order to penetrate the market and build a fresh distribution network in the country, the company offered higher trade discounts which were the cause of lower reported margins. This is a normal phenomenon for any new entrant in the consumer industry. FFL strongly feels it is now in a position to reduce its large trade discounts offered which would help improve margins complemented with efficiencies from changes in the current product mix going forward.
Recent Acquisition intent: (Annual Report 2018)
On July 31, 2018, Inner Mongolia Yili Industrial (Yili), a Chinese state-owned corporation showed its interest in acquisition of 51% stake in Fauji Foods Limited. Fauji group management and other party has commenced legal and due diligence formalities in this regard. However the Chinese company has withdrawn its intention to acquire majority stake in Fauji Foods Limited, according to a notice sent by the company to the Pakistan Stock Exchange (PSX), as both the parties failed to reach a mutual agreement with in the deadline.
REPORT TITLE 11
Conclusion & Future Outlook
Pakistan's economy continues to grow positively, led by growth in the manufacturing and services sectors and recovery in agricultural sector. Higher domestic demand and improvement in China Pakistan Economic Corridor backed infrastructural development is expected to provide further impetus to the growth momentum. In the coming period, expected rebounds in the commodity prices, weakening of the local currency, change in policy rate by the SBP may exert momentary pressure, however, the general outlook of Pakistan's economy remains positive.
The conclusion that can be drawn from the above ratios and fundamentals is that, the company was in net losses due the operating expenses. The company seems to have a lot of potential and various avenues in the market, in which it can tap into such as Yoghurt, Dry Milk Powder, Cream and Ice Cream. The company also seems quite determined to possibly launch new products, in the near future. Even though the company had seemingly negative margins in terms of net profit, the company however had positive Gross Profit. Therefore relatively, the acquisition did just a little good thing for the Nurpur brand; • Created initial market buzz • Helped with increasing the sales for the brand
For the time being, the company can focus on the Operational and Marketing cost management, which seems to be the primary problem for company. In fact, a better management, which can manage operating expenses efficiently, could also potentially turn the losses into profits, or prevent them from a further downfall.
It will take Fauji Foods considerable time to establish itself. Board confidence remains high in the growth potential of Pakistan's dairy market. Dairy industry is expected to recover from negative campaign, and it is expected to show growth in the future and regain the market share lost to lose milk segment. The Board is also confident about the future growth of the Company to deliver quality products while keeping a strong focus on innovation and operational excellence. Current capacity enhancement will enable it to contribute as key market player of the dairy industry. Company will continue to focus on improving shareholders' value through innovation, product and process optimization, effective cost controls and will continue to grow its market share. The positive factor is that investors have continued confidence in the performance of Fauji Foods as visible by the recent stock exchange activity and relatively stable share prices.
REPORT TITLE 12