Volume and price-driven topline growth
OLFI reported 4Q19 revenues of EGP667 million, up 7% YoY but down 9% QoQ. Seasonality weighted down on sequential revenues, reflecting in 13% decrease in volumes sold to 26k tons. OLFI’s topline for FY19 amounted to EGP2,588 million, up 8% YoY and exceeding our estimates by 9%. Annually, revenue growth is driven by gradual price increases during FY19 (6% YoY in white cheese and 8% YoY in milk) and a more subtle 2% YoY increase in volumes sold considering the low demand faced by the market during 1H19.
One-off items boost bottom-line
GPM recorded 19% in 4Q19, down 1pps YoY and 6pps QoQ, on the back of lower volumes and the company’s decision to maintain prices during the quarter. 4Q19 EBIT margin recorded 10%, declining by 3pps YoY and 12pps QoQ as SG&A/revenues surged on the back of higher wages. Hence, NPM dropped slightly to 8%, down by 1pp YoY and 7pps QoQ.
OLFI’s FY19 GPM recorded 21%, down c.1pps YoY on increased cost pressure (COGS increased 9% YoY vs Revenue +8% YoY). However, FY19 EBIT margin recorded 14% up c.1pp YoY on the back of lower SG&As/revenues (-1pp YoY) as the company lowered its marketing expenses by 67 % YoY. FY19 NPM recorded of 11%, up 1pps YoY on the back of the i) EGP8.9 million reduction in net interest expense on its debt due to lower interest rates and the restructuring of its debt facilities, ii) EGP9.6 million gain in sale of assets iii) and EGP25.8 million FX gain for FY19. Excluding the EGP35 million non-recurring items, 4Q19 and FY19 would record a NPM of 3% and 10% respectively.
Maintain OW on FV of EGP7.25/share; Management approves dividend distribution
We maintain our TP of EGP7.25/share and Overweight recommendation. Despite higher global skim milk powder (SMP) prices (+38% YoY versus Jan18), the strength of the EGP and declining interest environment is expected to support margins in 2020. OLFI also aims to gradually increase the contribution of its Juice and Milk products above the current 5% mark. In 2020, the company should be able to reap the fruit of its investment in 3 new packaging lines using new technology offered by Tetra Pak, which could produce 4k tpa and trim packaging costs by 5-10%. Management approved a cash dividend of EGP0.50/share for FY19 earnings, which translates to a dividend payout ratio of 68% and dividend yield of 8.3%.
OLFI is trading at 2020 P/E of 9.6x and EV/EBITDA of 6.8x compared to EM Peers P/E of 18.1x and EV/EBITDA of 10.0x. We note that the stock is oversold at current market price, but the low liquidity and lack of revenue diversification, we believe, create a barrier on stock price rerating. The dividend announced is a positive surprise.