Equity Analysis /
Egypt

Cairo Poultry: Despite annual recovery, topline and margins face sequential pressure

    Mohamed Hamza

    Volume & price adjustments enhance sales

    POUL reported 1Q19 revenues of EGP1,120 million, down 2% QoQ and up 4% YoY. Annual topline enhancement came on the back of higher volumes and prices for both poultry and processing segments: 

    • POUL capitalized on increased demand for poultry by increasing live-bird volumes by 7% YoY as a result of Egyptian households maintaining their preference to purchase higher volumes of live-birds, where consumers previously shifted their interest to cheaper imported poultry. In addition, market prices for broilers also witnessed a 22% increase, which constitutes c.80% of POUL’s poultry sales.
    • Processed food segment volumes surged by 38% YoY, along with a price increase of 19% YoY, following the depletion of the imported Brazilian frozen chicken, which were priced at an average c.EGP20/unit vs market average price of EGP28-29/unit
    • Poultry feed volumes fell on the back of lower poultry nurturing post government-dumping efforts in FY18. Also, aqua feed volumes were also negatively impacted by the prolonged winter.

    Stable profitability despite volatile GPM

    On a quarterly basis, GPM decreased to 13.2%  from 16.5% in 4Q18 on the back of slower topline growth as well as increased cost pressure (+2% YoY). On the other hand, EBITDA margin improved on account of ‘other operating revenues’ recording a 463% QoQ increase (EGP50 million vs EGP9 million in 4Q18). POUL booked provisions of EGP9 million vs a provision reversal of EGP13 million, which dragged NPM to 3.3% vs 4.1% in 4Q18 (-0.8pps QoQ).

    On an annual basis, GPM recorded 16.3% vs 9.8% in 1Q18, as a result of improved topline along with raw material costs (which constitutes 78% of total COGS) falling by 2% YoY. Despite a 3.4pps YoY improvement in GPM, EBITDA margin growth was pressured by a 56% and 43% increase in ‘other operational’ and SG&A expenses respectively to record 16.3% (+0.8pps YoY). Annual NPM came in flat YoY recording 3.3% owing to a decrease in provisions (-45% YoY), which offset an increase in interest expense (+50% YoY). 

    Normalized margins by 2H19; maintain Overweight

    The Federation of Poultry Producers estimates that Egypt's poultry production will increase to 1.5 billion chickens a year by 2020. It was also reported in the local news that average poultry prices have fallen in the early days of Ramadan from EGP34/kilo from EGP35-36/kilo (-5.8%) on the back of increased market supply. Therefore, we can expect 2Q19 margins to take a slight hit. However going forward, we anticipate healthier margins in 2H-FY19 through potential price increases and lower global corn & soya prices.  

    POUL is trading at an EV/EBITDA19 of 3.0x and P/E19 of 8.0x, which is below the peer group average of 7.7x and 11.6x, respectively. Management announced a cash dividend of EGP0.25/share, implying a dividend yield of 5.8% and a payout ratio of 81% (the highest recorded in the past 3 years). We maintain our Overweight recommendation and FV of EGP8.60.