Earnings Report /
Egypt

Obourland: 1Q22 – Topline hits record highs; margins recover sequentially with price hikes

  • White cheese saves the day; prices on a rally

  • FX losses hit bottom-line, preventing the reflection of solid performance

  • Maintain Equalweight

Marina William
Al Ahly Pharos Securities Brokerage
26 April 2022

White cheese saves the day; prices on a rally

OLFI recorded record breaking revenues at EGP924 mn for 1Q22, climbing by 4.5% QoQ and a stronger rise YoY of 39.2%. White cheese was the main contributor to sales by 93.3%, and the main contributor to the rise in top-line as it is the only segment achieving positive growth both annually and sequentially. Volumes witnessed a QoQ decline of 1.3%, while climbed YoY to reach 30.2 thousand ton. ASP gave the main blast as it climbed QoQ by 5.9% and YoY by 13.4%. Such an increase in prices was implemented to maintain the company’s margins against the rallying commodities as well as currency devaluations, both forcing strong inflationary pressures on costs. However, as prices continue to rise, volumes will be affected, and it could be already noticed in 1Q22. But with white cheese being an essential product for Egyptian consumers, such an effect on volumes is not expected to be drastic, and price increase will more than compensate for any missing growth in volumes as what is showing in 1Q22 results.

With such a hit to purchasing power, less-essential products are already witnessing a decline in sales driven by a drop in volumes, while the rise in prices is not enough to compensate. Milk segment witnessed a decline of 17.2% QoQ and a slight rise of 3.3% YoY to reach EGP51 mn for the quarter.

Juice segment was unfortunate on both the sequential and annual aspects, dropping by 43% an 18.6% respectively. Management decided to launch a new juice product that will be targeting lower income consumer segments at attractive prices, and they are expecting that product to push the segment into stronger sales levels.

Processed cheese segment recorded EGP9 mn, a slight drop QoQ of 1.1%, yet a rise of 8.5% YoY. The company is planning to introduce a new 50gm SKU, an equivalent to triangle cheese that will be sold at a relatively low price points.

FX losses hit bottom-line, preventing the reflection of solid performance

The company was able to maintain healthy gross profit and margins levels, despite the global inflation in raw materials and the latest devaluation, all thanks to their price increases. Gross profit recorded EGP200 mn, compared to EGP170 mn in 4Q21 and EGP157 mn in 1Q21 (+1.3% QoQ, +42.7% YoY). Leading to a GPM of 21.7%, versus 19.2% in 4Q21 and 23.6% in 1Q21. It is worth mentioning that SMP and palm oil (the company’s main raw materials) recorded way higher prices in 1Q22, compared to 4Q21 and 1Q21. Where crude palm oil averaged at USD1,411/MT in 1Q22, 18% higher QoQ and 51.5% higher YoY. While SMP, averaged at USD4,185/MT for the quarter, 16.9% up QoQ and 29.8% up YoY.

OLFI recorded strong EBITDA at EGP143 mn, 19.8% higher QoQ and 45.3% YoY. This was rather a result of trickling down of a healthy top-line rather than cost optimizations strategies, where SG&As reached EGP66 mn, (+17.5% QoQ, -1.6% YoY). EBITDA margin came in at 15.5%, versus 13.6% in 4Q21 and 14.9% in 1Q21.

Net profit for the quarter recorded EGP90.6 mn, a rise of 29.8% YoY, however, dropping by 5.1% QoQ. This drop could be mainly attributed to the increase in FX losses to reach EGP19.9 mn for the quarter, preventing the trickling down of a healthy top-line. NPM recorded 9.8% versus 10.5% in 1Q21 and 10.8% in 4Q21.

Maintain Equalweight

OLFI's strategy to gradually increase prices is showing a very positive effect on top-line. The company has a strong advantage that white cheese represents 93.3% of its total sales, and with white cheese being a key source of protein for the Egyptian consumer, it gives the company room to increase prices without volumes being hit hard. The recent currency devaluation and interest rate increase took a toll on the quarter's bottom-line, and as new interest rate hikes are expected to take place during 2022, net profit is expected to be further pressured as the company may increase their short-term borrowings to finance their inventory purchases at the current high prices. 

 OLFI is currently trading at a FY22 P/E of 7.1x and an EV/EBITDA of 4.7x.