White cheese volumes lagging sequentially; new juice brand sky rocketing
OLFI achieved a solid topline during 2Q22 of EGP874 mn, compared to EGP639 mn in 2Q21 and EGP924 mn in 1Q22, a YoY rise of 36.7% while dropping QoQ by 5.4%. The sequential slowdown could be attributed to a drop in white cheese volumes to reach 25k ton during 2Q22 caused by the seasonality of Ramadan, supply chain disruptions, inflationary pressures, and difficulties in importation of some of the packaging materials. This compares to 23.1k ton in 2Q21 and 30.6k ton in 1Q22 (+8.2% YoY, -18.3% QoQ). However, the drop was cushioned by the increase in ASP by 26.3% YoY and 15.8% QoQ. The aggressive increase in prices was implemented to offset the rallying costs of raw materials and packaging materials, as well as the latest devaluation of the Egyptian pound.
White cheese revenues recorded EGP810 mn, compared to EGP578 mn in 2Q21 and EGP862 mn in 1Q22 (+40.1% YoY, -6% YoY). The sequential drop could be justified by the devaluation occurring in March of 2022, with its effect on purchasing power still not present in 1Q22 financials and sales. However, 2Q22 sales were affected as consumers take in the initial shock of inflationary pressures. As price volatility levels off, volumes are expected to pick up again, especially in the white cheese segment due to its less elastic demand.
Milk segment recorded revenues of EGP39.5 mn, compared to EGP40.1 mn in 2Q21 and EGP51 mn in 1Q11, dropping both annually and sequentially by 1.5% and 21.8%, respectively. Milk products continue the slowdown that has started at the beginning of the year as a result of price increases and weak market positioning among large players. However, price increases counterbalanced the volumes drop and prevented steeper declines in performance.
The juice segment recorded outstanding levels of growth during 2Q22 as it recorded EGP20 mn, compared to EGP10 mn in 2Q21 and EGP6 mn in 1Q22 (+103% YoY, +256.1% QoQ). Such a boost could be mainly attributed to their new brand “Lovely” which targets lower income consumer segments with lower price levels compared to the original Obour Land brand.
Processed cheese segment recorded revenues of EGP7.3 mn, compared to EGP6.6 mn in 2Q21 and EGP9 mn in 1Q22, climbing YoY by 10.6% and dropping QoQ by 18%. The company is planning to introduce a new 50gm SKU with a very low price point to be used on the go.
1H22 revenues recorded EGP1,798 mn, compared to EGP1,303 mn in the previous period, achieving a YoY growth of 38%. The spike was supported by both ASP and volumes of their main white cheese segment. Volumes for the period recorded 55.2k ton, compared to 47.7k ton in 1H21 a YoY rise of 15.7%. ASP climbed by a full 19.2% to compensate for increase in costs.
Healthy margins maintained sequentially, despite rallying costs
OLFI was able to maintain healthy margins despite the increasing costs, due to their aggressive price increases. Gross profit recorded EGP192 mn for 2Q22, compared to EGP155 mn in 2Q21 and EGP200 mn in 1Q22. (+23.7% YoY, -4.3% QoQ). GPM stabilized at 21.9%, versus 24.2% in 2Q21 and 21.7% in 1Q22, a YoY drop of 2.3pps and a QoQ rise of 0.3%. Moreover, it is worth mentioning that the company’s main raw materials of SMP and Palm oil witnessed sharp increases during the quarter. SMP averaged at USD3,394/MT during 2Q22 (+26.6% YoY, +2.6% QoQ), while crude palm oil averaged at USD1,453/MT during 2Q22 (+47.7% YoY, +3.0% QoQ).
Gross profit for 1H22 came in at EGP392 mn, compared to EGP312 mn the previous period reflecting a rise of 25.8% YoY. GPM for the period recorded 21.8%, versus 23.9% in 1H21, a YoY drop of 2.11pps due to the pressures caused by increasing costs.
EBITDA for the quarter came in at EGP135 mn, a YoY rise of 24.5% and while showing a QoQ drop of 6.1%, leading to an EBITDA margin of 15.4%, versus 16.9% in 2Q21 and 15.5% in 1Q22 (-1.5pps YoY, -0.1pps QoQ). This drop in margins was rather a trickling down of topline and gross profit performance, along with a rise in SG&A expenses where they witnessed a rise of a full 17.7% YoY. EBITDA for 1H22 recorded EGP278 mn, compared to EGP207 mn in 1H21, a YoY rise of 34.4%. EBITDA margin recorded 15.5%, versus 15.9% in 1H21, a YoY minor drop of 0.4pps.
Net interest came in the red this quarter with an expense of EGP8 mn, compared to EPG6 mn in 2Q21 and an interest income of EGP2 mn in 1Q22. Net debt increased remarkably by 2Q22 end to record EGP515 mn, compared to EGP233 mn by 2Q21 end and EGP281 mn by 1Q22 end, mainly fuelle by an increase in credit facilities used to finance working capital needs amidst rising prices of commodities.
FX losses recorded EGP3 mn for the quarter, compared to EGP19.9 mn in 1Q22 and FX gains of EGP0.4 mn in 2Q22.
Bottom line for the quarter recorded EGP90.2 mn, compared to EGP74.2 mn in 2Q21 and EGP90.6 mn in 1Q22 (+21.6% YoY, -0.4% QoQ), reflecting a margin of 10.3%, versus 11.6% in 2Q21 and 9.8% in 1Q22. Net profit for 1H222 recorded EGP181 mn with a margin of 10.1%, compared to EGP144 mn in 1H21 with a margin of 11.1%, negatively affected by recorded FX losses of EGP22.9 mn, versus FX gains of EGP0.7 mn in 1H21.
Commodities cool down and higher prices to boost margins; maintain Overweight
OLFI managed to maintain a healthy level of margins despite the rallying global and local raw materials during the quarter backed by their pricing policies and the healthy demand for cheese as a cheaper source of protein. As raw material prices cool down (already been noticed during the month of July), we could see margins picking up as costs start to decline and selling prices maintain their levels.
We have previously raised our FV for OLFI from EGP8.00/share to EGP8.50/share, maintaining our Overweight recommendation.
OLFI is currently trading at a FY22 P/E of 6.1x and an EV/EBITDA of 4.7x.