Equity Analysis /
Egypt

Cairo Poultry: 4Q19 – Depressed poultry prices pressure FY19 results, maintain EW

  • Net loss of EGP36 million vs net profit of EGP47 million in 4Q18, and EGP26 million in 3Q19.

  • Revenues of EGP959 million (-14% QoQ and -16% YoY), on lower demand and excess supply in the poultry market

  • GPM of 9.3% vs 16.5% in 4Q18 (-7.1pps) and 13.0% in 3Q19 (-3.7pps)

Al Ahly Pharos Securities Brokerage
8 March 2020

Lower Poultry Prices Drag Annual and Sequential Topline

POUL reported 4Q19 revenues of EGP959 million, -14% QoQ and -16% YoY. Annual topline contraction came on the back of lower demand and excess supply in the poultry market caused by weak purchasing power. This in turn dragged down poultry prices while simultaneously reducing the demand for feed, thus putting more pressure on feed prices and volumes during the second half of the year. During 4Q19, the prices of chicks and live birds dropped to the lows of EGP2.0/chick and EGP16.0/kg respectively on the back of weakening demand which resulted in an overall drop in poultry prices by 10% YoY during 4Q19 compared to 4Q18.

FY19 revenue recorded EGP4,415 million vs EGP4,575 million in FY18 (-3% YoY). This comes as the following developments occurred in FY19 per segment on a YoY basis:

  • Feed Segment: the decline in global commodity prices and EGP/USD appreciation versus FY18 caused feed revenues to decline by 24% YoY on account of diminishing rearing activities mirroring the recent fall in poultry prices during the previous period.
  • Broiler Segment: Despite the slowdown in the overall market of rearing operations, POUL was able to increase its sales volumes of broiler chicks and live bird by 11% YoY and 7% YoY respectively during FY19. In parallel, live-bird prices increased by 3% YoY (from EGP22.3/kg to EGP23.0/kg). 
  • Processing and Further processing Segment: recorded volume recovery of 15% YoY on the back of regaining market share that was lost in favor of the imported frozen chicken during 2018. Additionally, the segment continued to benefit of low live bird prices in FY19 thus the overall segment’s volumes in 4Q19 recorded the highest level since the beginning of 2018, achieving 23% YoY and 13% YoY increase.

Margins Saved by Raw Materials Gains and FX Strength

FY19 GPM recorded 13.2% vs 13.6% in FY18 (-0.4pps YoY). Considering the weaker topline performance, FY19 GPM recorded contraction in view of raw material costs (which constitutes 75% of FY19 COGS) falling by 7.1% YoY. The decline in GPM was reflected in a lower EBITDA margin of 15.6% in FY19 (-0.2pps YoY), on account of a +1.5pps YoY increase in SG&A expense/Revenues to 9.3% driven by a +34.0% YoY increase in salaries and wages. POUL also recorded a modest increase in other revenues, recording EGP132 million in FY19 versus EGP121 million in FY18 (+8.9% YoY). In a similar manner, FY19 NPM also recorded a YoY decline of -0.5pps YoY despite the lower interest expense (-18.4 YoY) following the recent successive interest rate cuts and the FX gain of EGP18 million. 

Don’t Count Chickens Before Eggs Hatch

We expect the decline in rearing activities and low supply owing to a higher mortality rate during the winter season to push prices up to normal levels during 1Q20, thus supporting margins for the next quarter. 

POUL is trading at a 2020 EV/EBITDA of 3.8x and P/E of 9.3x, which is slightly below the peer group average of 8.4x and 12.2x, respectively. 

In Feb20, POUL received a binding offer from Cairo Three A for International Industries to buy their shares in the ‘Egyptian Company for Starch and Glucose Industries’, which represent 13.7 million shares or 27% of its total share capital. The offer also extends to Americana Group for Food and Touristic Projects and Egyptian International Touristic Projects for a total of 91.5% of ESGI’s share capital, at a range from EGP450-510 million, implying a price per share of the company ranging from EGP8.98-10.18. The final price will be decided following due diligence, which will be completed by 9 April 2020, but if POUL accepts the offer its proceeds will amount to EGP123 million to EGP139 million, or EGP0.26 to 0.29/POUL share.