Earnings Report /
Egypt

Cairo Poultry: Q2 19 – Normalised margins on the mend; maintain Overweight

    Mohamed Hamza
    Al Ahly Pharos Securities Brokerage
    14 August 2019

    Market recovery boosts sales

    POUL reported Q2 19 revenues of EGP1,221mn,  up 9% qoq and 4% yoy. Annual top line boost came as a result of market recovery following the depletion of the imported frozen poultry, resulting in higher volumes and prices for both poultry and processing segments. 

    • Broilers volumes grew by 19% yoy on account of Egyptian households shifting preference towards live-birds vs frozen imported poultry. As a result, management were also able to increase live-bird prices by 12.4% yoy (from EGP22.5/kg to EGP25.3/kg). 
    • Since the depletion of imported poultry, consumers have moved to buying local frozen products. Therefore, POUL’s whole frozen segment volumes grow by 39% yoy, accompanied by price increases of 13% yoy. Further processing (Koki) has also seen improved volumes and prices (+6% and 12% yoy, respectively). In total, processing volumes increased by 16% yoy.
    • Poultry feed volumes maintained its negative trend since Q1 19 due to lower poultry nurturing post government-dumping efforts in FY 18. However, aqua feed volumes picked-up pace in Q2 19 in line with the start of the consumption season. 

    Improved margins across all levels

    On an annual basis, GPM recorded 16.5% vs 12.0% in Q2 18 on account of enhanced top line as well as raw material costs (which constitutes 79% of total COGS) falling by 5% yoy. Despite SG&A expenses increasing by 19% yoy, EBITDA margin growth (+5ppts) was sustained following ‘other operating revenues’ growing by 54% yoy. Annual NPM also recorded a yoy growth of 6.4ppts on the back of lower interest expense (-34% yoy), lower provisions (-63% yoy), and higher FX gain. 

    Anticipated enhanced margins in H2 19; maintain Overweight

    With signs of market recovery following the depletion of the cheap Brazilian frozen poultry, we expect POUL to continue to regain volumes, as witnessed in Q2 19. We also expect that the recent subsidy cuts should not majorly impact POUL’s cost structure following the head of the Domestic Poultry Division claiming that electricity cost accounts for 7% of total cost and is expected to only increase by 3ppts (10%). Therefore, we anticipate healthier margins in H2 19 through prospective volume & price increases as well as lower global corn & soya prices.

    POUL is trading at an EV/EBITDA19 of 3.4x and P/E19 of 8.2x, which is below peer group average of 7.7x and 11.6x, respectively.