Equity Analysis /
Bangladesh

Olympic Industries: Earnings growth plateaus; reiterate Hold

    Tanay Kumar Roy
    Tanay Kumar Roy

    Research Analyst

    S. M. Galibur Rahman
    IDLC Securities
    9 May 2019
    Published by

    Double-digit revenue growth couldn’t translate into bottom line due to higher interest expense and higher tax: Olympic reported NPAT of BDT 474 mn in Q3 FY 2019 against BDT463 mn of Q3 FY 2018, implying 2.4% YoY growth. Revenue grew by 10.4% YoY in Q3 FY2019 but due to high interest cost and 13.5% higher tax expense bottom line growth was subdued. In 9 months of FY 2019 revenue and NPAT grew by 8.4% YoY and 4.0% YoY respectively against our full year growth expectation of 12.5% and 9.8%. 9M FY 19 result is 400bps lower than our expectation.

    Maintain Hold: Our 2019f TP of BDT 234.5 (based on 23.8x P/E and 14.6x EV/EBITDA on 2019f) implies an ETR of 9.6%, suggesting its trading near its fair value compared to its fundamentals. We maintain our Hold rating for Olympic. 

    Gross margin deteriorated marginally YoY but increased QoQ: Gross margin deteriorated to 32.3% in Q3 FY2019 from 32.5% of Q3 FY2018. Rising raw material price caused this deterioration. However, it improved from last quarter’s gross margin of 31.0%. Global sugar price started declining from February which we expect to improve its gross margin in coming quarters. In 9 months of FY 19, gross margin stood at 32.0% against our full year expectations of 32.9%. 

    Opex grew by 11.1% YoY compared to gross profit growth of YoY 9.7%: Opex growth was higher than gross profit growth. As a result operating profit growth was 8.7% compared to 10.4% growth of revenue. Opex as % of sales increased marginally to 14.1% in Q3 FY2019 compared to 14.0% of Q3 FY2018. However, it improved from 14.7% of Q2 FY2019. Overall, in 9 months of FY2019, opex as % of sales was 14.3% in line with our full year expectation of 14.3%. 

    Higher interest rate and higher tax expense resulted into subdued NPAT growth: Interest expense increased significantly compared to low base of last year same quarter. Besides, total debt increased by 9.8% to BDT 2315.3mn. In this quarter, effective tax rate 200bps was higher than last year same quarter. As a result, tax expense was 13.5% higher in Q3 FY2019. This higher interest and tax expense resulted into 2.4% YoY growth in NPAT. 

    Upside risk to the valuation: We have not considered any impact of Mondelez deal as we don’t have any authentic information on this deal.