Earnings Report /
Egypt

Cairo Poultry: 3Q22 – Taxes, rising costs and stagnation in demand weigh down on margins

  • Stagnation in Demand Impacts Top-line; Processing Segment Main Supporter

  • Turbulence in the Local Commodities Market Pressures Margins; Bottom-Line Dives Down with Unfortunately-Timed Taxes

  • New Feed Prices to Be Maintained One Way or the Other; Resumption of Natural Life Cycle Is Expected by 2023

Al Ahly Pharos Securities Brokerage
16 November 2022

Stagnation in Demand Impacts Top-line; Processing Segment Main Supporter

Revenue continued its sequential climb, but minimally this time around. Revenues for the quarter came in at EGP1,634 mn, compared to EGP1,227 mn in 3Q21 and EGP1,623 mn in 2Q22, a rise of 33.2% YoY and 0.7% QoQ. 9M22 revenues climbed by 29.2% YoY, backed by rising global commodity prices which affected the selling prices across all POUL’s revenues streams, as well as higher broiler, chicks, and processing volumes.

Feed volumes for the quarter remained higher than the previous two quarters, but declined by 3% YoY. Such a drop came on the back of suppressed demand from lower rearing activities as local feed prices have reached record-breaking levels. Feed revenues for 9M22 recorded EGP1,341 mn, compared to EGP989 mn recorded in 9M21, a rise of 35.6% YoY and a total contribution to revenues of 28.4% versus a previous 27.1%. This rise recorded in the 9M period was a price-driven effect as volumes dropped by 2% YoY.

Broiler chick volumes declined 8% YoY for 3Q22, due to farmers’ reluctance to breed amid high raw materials prices, while live bird volumes witnessed a 7% increase YoY. The prices for the poultry segment have been stable throughout the quarter compared to the previous one. 9M22 parent chick volumes witnessed a decline of 25% YoY, while broiler chicks and live bird volumes showed strong resilience and stood at the same level as 9M21. Prices of the parent chicks increased by 7% YoY, while prices of the broiler chicks and live bird jumped by 17% and 27%, respectively.

3Q22 processing volumes climbed by 14% YoY and 4% QoQ despite weakening purchasing power. Average prices for the quarter maintained the same level as 2Q22. 9M22 processing volumes climbed by 18% YoY, backed by the launch of the online shopping platform and the introduction of new products.

Turbulence in the Local Commodities Market Pressures Margins; Bottom-Line Dives Down with Unfortunately-Timed Taxes

Gross profit for the quarter recorded EGP130 mn, a decline of 5.9% YoY and 55% QoQ. This decline came backed by a rally in COGS by 12.7% YoY and 38.1% QoQ due to the commodity shortage problem peaking during the quarter. This led to a GPM of 8%, versus 11.3% in 3Q21 and 17.8% in 2Q22 (-3.3pps YoY, -9.8% QoQ). 9M22 gross profit recorded EGP595 mn, compared to a previous EGP403 mn recorded in 9M21, a rise of 47.7%. The record-breaking profitability of 2Q22 was the main reason for such a hike in 9M22 as 2Q22’s gross profit forms 49% of 9M22’s gross profit. GPM for the period recorded 12.6% versus 11.0% in 9M21 (+1.6pps YoY).

SG&A expenses recorded EGP93 mn, higher 5.2% YoY and 9% QoQ, mostly on the back of higher distribution and transportation expenses associated with higher processing business. Their percentage to revenue came in at 5.7% during 3Q22, compared to 7.2% in 3Q21 and 5.3% in 2Q22. Weakening gross profit and heightened expenses reflected on a weaker EBITDA of EGP67 mn (-6.1% YoY, -71.3% QoQ), leading to a margin of 4.1% for the quarter, versus 5.9% in 3Q21 and 14.4% in 2Q22. 9M22 EBITDA recorded EGP414 mn (+76.2% YoY), reflecting a margin of 8.8%, versus a previous 6.4% recorded in 9M21. This rise was backed by a trickling down effect of healthy top-line and gross margin, despite the rise of SG&A expenses by 11.1% YoY.

POUL managed to achieve other operating income of EGP51 mn for the quarter, preventing a further dip in bottom line, mainly backed by reversal of provisions.

Bottom line for the quarter came in at a loss of EGP16.4 mn, compared to profits of EGP42.3 mn in 3Q21 and a record-breaking bottom line of EGP183.3 mn in 2Q22. However, this decline was not purely operational; it came backed by a one-off intergroup dividends tax amounting to EGP30.9 mn. Without the one-off tax effect on performance, POUL would have recorded net profits of EGP13 mn, which would still be a weaker quarter compared to 3Q21 and 2Q22 due to the trickling down of a weaker gross profit eaten up by increasing costs as local feed prices reached unprecedented levels. NPM for the quarter came in at -1%, versus 3.4% in 3Q21 and 11.3% in 2Q22 (-4.4pps YoY, -12.3% QoQ).

9M22 bottom line came in at EGP221 mn, compared to EGP122 mn recorded in 9M21, a rise of 81.5% YoY, reflecting a margin of 4.7%, versus a previous 3.3% (+1.3% YoY), backed by not only a healthy trickling down from gross profit, but also with a decline in net interest expenses by 21% YoY.

Net debt position reached EGP533 mn by the end of September 2022, compared to EGP435.6 mn recorded at June 2022 end. The climb came on the back of the severe drop in cash by 68.5% to record EGP93 mn from a previous EGP295.7 mn, driven by a severe outflow for inventories, inflated by the rise in production materials’ costs, and despite debt levels dropping by 14.4% to reach EGP626 mn, compared to a previous EGP731 mn.

New Feed Prices to Be Maintained One Way or the Other; Resumption of Natural Life Cycle Is Expected by 2023

Regardless of the unfortunately-timed tax expenses, POUL witnessed a weak quarter backed by heightened costs and weak market demand as customers await any possible ease in selling prices as the feed shortage problem gets resolved. However, once the shortage problem gets resolved, price levels for poultry and feed will sustain their new high as they reflect the new exchange rate, eventually bringing the market into acceptance for the new prices. Moreover, as this acceptance is reached, the market is expected to be in a state of high demand and supply shortage that will encourage the breeding once more and lead to a recovery in selling volumes.

While this stage may be reached by early 2023, 4Q22, which is already characterized by weak seasonality, will be another weak quarter, leaving 2022 with 2Q22 as the only supportive quarter.

POUL is currently trading at a FY23 P/E of 3.6x and an EV/EBITDA of 3.0x.