Equity Analysis /
Egypt

Obourland: 1Q19 – Annual topline improves but raw materials squeeze margins

    Farida Salama

    Annual topline driven by higher volumes and prices; volumes drag quarterly topline performance 

    OLFI recorded revenues of EGP575.8 million in 1Q19, down 8% QoQ and up 26% YoY. Annual topline growth was supported by a 14% increase in white cheese volumes and a 5% increase in ASP. Despite a 5% implemented price hike in Feb-Mar19, quarterly revenues were dragged by a 7.6% drop in volumes recording 24k tons, down from 26k tons in 4Q18. Milk and Juice revenues recorded EGP32.7 million, up 118% YoY (which currently stands at 5.7% out of total revenues).

    Margins shrink on higher operational costs

    GPM came in at 20.6%, down 0.1pps QoQ and 2.7pps YoY. Gross margin noticeably dropped annually on account of higher global Skim Powder Milk (SMP) prices (c.+28% YoY) and higher protein concentrate prices (c.+22% YoY). EBITDA margin declined to 12.2% in 1Q19, down 1.6pps QoQ and 4.6pps YoY. Annual and quarter margins drop was caused by a 2pps increase in SG&A/revenues owing to higher marketing expenses and an increase in the number of direct retail vehicles; hence increasing salaries and car expense costs. NPM recorded 9.2%, down 0.1pps QoQ and 1.8pps YoY. NPM came in flat quarterly as a result of a 99% decrease in net interest expense (company paid-off short-term debt), and dragged annually by an increase in income tax expense (+10% YoY). 

    Maintain OW on FV of EGP10/share

    OLFI launched its new Mozzarella product in April and it is currently in a trial phase. Milk and Juice prices are increasing at an average of 8% in April-May19, with no further price increases in white cheese for 2Q19.  Due to higher global SMP prices (c.+2.2% QTD and c.26% YoY), margins are expected to remain pressured in 2Q19. The company targets revenues of EGP2.8 billion (+10% volume and +5% ASP), with a GPM of 22% for FY19.

    OLFI is trading at 2019 P/E of 13.9x  and EV/EBITDA of  8.2x  vs local and emerging market peers of 19.1x vs 9.8x, respectively.  We maintain our TP of EGP10.0 with an Overweight recommendation.