Earnings Report /

National Foods: FY 19: Volume growth and price adjustments drive top-line

    Takudzwa Sherekete
    Takudzwa Sherekete

    Junior Equities Analyst

    IH Securities
    21 October 2019
    Published by

    Volume growth in maize and stock feed divisions drive profitability 

    The Group recorded overall volume of growth of 12% to 610.8k tonnes, sustained by 60% and 42% volume growth in the Maize and Stockfeed divisions, respectively. Volume growth was encouraged by the relative affordability of maize, which the government continued to sell at subsidised pricing. The gains in the above mentioned divisions offset an 18% decline in flour volumes down to 249k MT due to constrained raw material supply, which resulted in shortages of flour arising from foreign currency challenges. 

    Revenue was up 90.0% to $566.17mn from $297.93mn, largely driven by price adjustments. Gross margins improved to 33.9% from 23.5%, largely influenced by a lag in the cost of raw materials. Opex for the year increased 132% as compared to the prior year. EBITDA grew 270.4% to $81.97mn from $22.13mn outpacing revenue growth due to the accrual of cost optimisation benefits and a lag in some operating costs. Profitability of all divisions exceeded inflation, with the exception of MCG and Pure Oil. Overall, Group PAT increased to $56.62mn from $17.18mn for the financial year, translating into a 229.7% growth in PAT. 

    Upgrade to Buy on attractive multiples

    We are optimistic about performance going forward, as we anticipate that the country will continue to rely on significant imports, which will likely compel the government to allow private sector players to import directly in most grains. We further anticipate that inflationary pressure will catalyse revenue uplift from higher product pricing. We expect revenue to rise 84.6% yoy to $1.05bn for FY 20. We expect lagged costs to catch up leading to margin pressure, which will trickle down from GP level. EBITDA margin is anticipated to soften to 13.8% yoy translating to an EBITDA of $144.2mn in FY 20. 

    We estimate that National Foods trades on a PE (+1) of 6.5x to 2020e, compared to peers at an average PE (+1) of 14.9x and EV/EBITDA (+1) of 4.4x, compared to peers at an average EV/EBITDA (+1) of 8.9x. Using a weighted DCF and multiples valuation we have arrived at a target price of $12.84 for National Foods. This implies upside of 42.6% at current levels. We therefore upgrade our recommendation to a strong Buy.