Slower snack food demand drags volumes
Edita (EFID) recorded a topline of EGP964 million in 1Q20, down -1.8% YoY and -11.7% QoQ. The contraction was mainly attributable to a lower number of packs sold (-5.2% YoY and -15.2% QoQ), but was partially balanced out by the company’s strategy to migrate its portfolio towards a higher price point. EFID’s average price/pack managed to increase by 3.6% YoY and 4.1% QoQ to EGP1.52, supported by the introduction of higher-value propositions over 4Q19-1Q20.
Sequential topline performance was affected by sluggish snack food demand during the first quarter of the year, which was further compounded with the onset of the global Covid-19 pandemic towards the end of the quarter. This was especially evident in the bakery and cake segments (c.70% of 1Q20 revenues), which were negatively impacted by the nighttime curfew, closure of all schools and universities and difficulties in international trade. Revenue contraction was more subtle on an annual basis, slightly backed by expansion in the bakery (+8.8% YoY) and candy (+6.3% YoY) segments on the back of the launch of ‘upsized’ product offerings like ‘Molto Magnum’ and ‘Molto Sandwich’.
Slight margin erosion as topline contraction exceeds cost savings; Higher SG&A expenses hit the bottom line
1Q20 gross profit came in at EGP335 million (-3.4% YoY and -16.3% QoQ), reflecting a GPM contraction of -0.6pps YoY and -1.9pps QoQ to reach 34.8%. This comes as EFID recorded cost savings in direct materials (-5.1% YoY and -12.6% QoQ) during 1Q20, which was offset by higher manufacturing overheads (+16.6% YoY and +6.0% QoQ) due to increased overtime expenses for factory employees.
EBITDA margin recorded 12.2% (-8.2pps YoY and -6.9pps QoQ), dual-driven by the shrinkage on the GPM-level and the +8.5pps YoY and +5.4pps QoQ increase in SG&A expense/Revenues on account of higher marketing activities taken to support the new product launches in the cake, bakery and candy segments. SG&A was also impacted by the expansion of Edita’s distribution fleet, with the company adding 200 new vehicles during the period to reinforce its retail sales channel.
Attributable net profit for the quarter amounted to EGP64 million, -43.7% YoY and -41.3% QoQ. Meanwhile, NPM came in at 6.7% (-5.0pps YoY and -3.4pps QoQ), recording a drop despite the increase in the ‘export incentive’ line item reaching EGP28 million in 1Q20 versus EGP4 million in 1Q19 and EGP3 million in 4Q19.
Weakness to continue in 2Q20, recovery expected in 2H20
We expect EFID to deliver muted volume growth during the second quarter of 2020, dragged by lower demand for snack food during the quarantine period and Ramadan season. Beyond 2Q20, the company’s investment in a new biscuit production line and in enhancing its distribution capabilities should pay off favorably coupled with better seasonality during the 2nd half of the year. Additionally, EFID is on schedule to begin operations in its greenfield investment in Morocco by the end of FY20.
We expect EFID’s net debt balance to increase over the rest of FY20, as a result of the recently signed MTLs for Edita and its subsidiary for EGP96 million and EGP155 million respectively to partially finance its planned capital expenditures for the year. Although the company may see higher inventory levels to ensure business continuity across its operations amidst any possible future shortages in imported raw materials, this should not put a strain on EFID’s liquidity position given the negative nature of its cash conversion cycle.
EFID is currently trading at an annualized 2020 P/E of 22.7x and EV/EBITDA of 12.1x vs local and emerging market peer average of 25.2x and 10.9x, respectively.