KARACHI: Dalda Foods Ltd and its parent company are going to raise more than Rs7 billion through the stock market by selling 25 per cent shares in the edible oil business, according to a recent regulatory filing.

The food entity will issue 30 million new shares at the minimum price of Rs85 apiece while its holding company, DFL Corporation, will sell 52.5m existing shares at the same price.

Dalda Foods wants to reduce its reliance on the import of edible oil by backward-integration. It will use the raised funds to expand the crushing capacity of its seed extraction plant from 300 tonnes per day to 500 tonnes.

The company will utilise the raised money for increasing seed extraction plant capacity

The country’s edible oil industry is worth around Rs500bn and has been growing at an average annual rate of 7pc, according to industry estimates. About 4m tonnes of edible oil and fats are consumed in Pakistan annually. More than 60pc of it is used for home cooking while the rest is utilised by the industrial sector. Dalda Foods operates in both segments.

The company’s popular brands include Dalda, Tullo and tea whitener Cup Shup.

Deal structure

The Pakistan Stock Exchange (PSX) has placed the draft prospectus carrying the financial accounts of the company on its website to seek public comments until Aug 9.

The issue will take place later through book building in which high net worth individuals and institutions will bid for the stock to determine ‘strike price’ at or above the minimum price of Rs85 per share. They will be allotted 75pc of the issue while retail investors will be offered the remaining 25pc at the same price. Sales and profit of Dalda Foods have grown at an average rate of 12.8pc and 17.4pc, respectively, since 2010. According to unconsolidated financial statements released to the public, the company recorded sales of Rs26.8bn for 2015-16, up 11.6pc annually. Its profit dipped 14.5pc to Rs1.6bn over the same period.

Assuming the strike price of Rs85 a share, the company offers investors the price-to-earnings multiple of 12.5. The ratio reflects investors’ willingness to pay Rs12.50 for every single rupee of profit earned by Dalda Foods. In contrast, eight peer-group companies listed on the stock exchange, including Engro Foods, Unilever Pakistan Foods and Nestle Pakistan, offer the average multiple of 31.2. This means Dalda Foods offers investors a discount of 60pc at the base price of Rs85 per share.

Speaking to Dawn, Insight Securities Executive Director for Research Zeeshan Afzal said the company offers ‘attractive’ valuation. “The company’s fair value could be around Rs150 per share after the public offering, assuming the price multiple of 24 for peer companies (excluding Engro Foods),” he said.

But the time of the listing may not be opportune, he added. The benchmark index has shed about 11pc value since hitting its peak on May 24 partly because of political turmoil. Moreover, recent public listings, such as Roshan Packages, Ittefaq Steel and the PSX, failed to generate immediate capital gains for investors, Mr Afzal said.

Published in Dawn, August 4th, 2017