In our initiation report we had highlighted that over the next few years Britannia’s profitability was likely to continue to see an improvement. However, recent results where the company reported its highest Ebitda margins in 24 quarters increases our confidence in the delivery of improving profitability, and at a faster pace than our previous expectations. We raise our estimates by 5-7% and roll forward our target price base to the June 2017 quarter, which increases our target price from R2,560 to R2,915; implying 8.2% potential upside from current levels. We reiterate Britannia as one of our preferred picks in the sector from a medium-term perspective where we see opportunity for the company to drive strong topline growth and see improving profitability. Assuming no further earnings changes, and keeping valuation multiples constant, we would be looking at a target price of R3,415 at the end of FY16F only on account of roll forward, implying 27% potential upside from the current level.
As GDP growth outlook improves over the next few quarters, we expect thereto be a pick-up in discretionary spends with packaged food as one of the key beneficiaries. We expect urban consumer demand to pick up quicker than rural demand and as Britannia over-indexes in the urban areas, particularly on its premium-end cookies, we expect this to drive both topline growth as well as improvement in margins. We would continue to buy into Britannia at current.
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