Equity Analysis /
Egypt

Obourland: 2Q19: Lower volumes drag annual topline; lower SG&As boosts profitability

    Farida Salama
    Al Ahly Pharos Securities Brokerage
    25 August 2019

    Topline dragged by lower volumes yoy; prices and volumes drive sequential improvement 

    OLFI 2Q19 revenues amounted to EGP612 million, up 6% QoQ and down 9% YoY. Sequential improvement was price and volume driven. Volumes grew by 4% QoQ while 1Q19 price hikes (+4%) reflected on 2Q19 revenues. Annual drop came on the back of lower volumes (-13.8% YoY) and high base effect of 2Q18. Revenues recorded EGP1,188 million in 1H19, up 5% YoY (+6% YoY ASP, -2% YoY volumes). 

    Higher operational costs burden margins; lower SG&A enhances profitability 

    GPM came in at 20.4%, flat QoQ and down 4.5pps YoY. Annual GPM was dragged by higher raw material prices (SMP c.+20% YoY) reflecting on COGS/revenues (+4.5pps) reaching 79.5%. Quarterly, revenue improvement (+6% QoQ) was fully absorbed by an increase in COGS (+6% QoQ), hence resulted in a flat performance. EBITDA margin recorded 16.5%, up 4pps QoQ and flat YoY. EBITDA improved sequentially on lower SGAs/revenues (-4pps QoQ) backed by lower marketing expenses and selling old vehicles with high running costs. Annual EBITDA improvement, caused by lower SGAs/revenues (-5pps), was offset by a considerable YoY drop in GPM (4.5pps) resulting in a flat EBITDA performance. NPM recorded 12.1% in 2Q19, up 2.9pps QoQ and 2.5pps YoY.  Despite an increase in tax expense (+15% QoQ) and net interest expense (+49%), NPM expanded on FX gains of EGP9 million. 

    Maintain OW on FV of EGP10/share

    OLFI decided to cancel its Mozzarella cheese product after a trial phase in 2Q19. The company also implemented a 2% price increase during July17 (+6% YTD). Management expects 3-5% higher volumes and a total revenues of EGP2.8 billion in FY19. We believe volumes could pick up in 2H19 on the back of better seasonality. Accordingly, we believe margins could pick up on the back of improved volumes and higher prices.

    OLFI is trading at 2019 P/E of 10.4x  and EV/EBITDA of  6.2x. We maintain our TP of 10.0/share and overweight recommendation.