The food sector has outperformed the benchmark KSE-100 index by around 13 percent in the last 12 months owing to the consistent growth in sales and stable margins.
According to a report by JS Global, the sector’s trailing annual top line has expanded by 28 percent year-on-year (YoY) as a result of rising commodity prices, changing consumer behavior, and higher inflation. On the other hand, (1) higher finance costs owing to a rise in interest rates and (2) higher taxation due to the imposition of Super Tax, impacted the bottom line for the period which was fairly offset by the passing on of higher manufacturing costs that led the bottom line to rise 19 percent YoY.
The report reviews the food sector’s financial performance with a sample size of ten companies as a proxy to the listed food sector.
The sector’s margins faced some pressures in the previous few quarters as input costs increased for food manufacturers making them struggle to completely pass on the impact of unprecedented increment in commodity prices along with a surge in fixed costs to the end consumer. Nevertheless, our sample base managed to maintain gross margins at 24 percent for the September 2022 quarter, slightly lower (-1ppt) on a QoQ basis and also compared to the same period last year.
Despite a rising cost scenario, the sector was able to broadly preserve its operating margins over the quarters depicted by only a 1ppt QoQ/YoY decline during the September quarter, clocking in at 12 percent. This was possible by control over selling and administrative costs.
During the last 12 months, the food sector outperformed the benchmark index by ~13 percent (5.3 percent performance), taking the sector’s trailing P/S and P/E to 1.54x and 19.40x, respectively. The report observes that based on current multiples, a forward P/E of ~16.17x suggests that there is further upside potential if the bottom line growth rate for the food sector is assumed to be 20 percent.
