Earnings Report /
Egypt

Obourland: OLFI 3Q22 | Record-breaking revenues eaten up by inflationary costs

  • White cheese back on track after a slight drop in the previous quarter

  • Record-breaking revenues eaten up by inflation in costs

  • Gains higher market share on small players' shutdowns; Heightened cash & payables tied to foreign currency availability

Al Ahly Pharos Securities Brokerage
18 October 2022

White cheese back on track after a slight drop in the previous quarter

Revenues for the quarter came in at a record-breaking level of EGP1,343 mn, an upsurge of 63.8% YoY and 53.7% QoQ. While the rise came supported by all segments annually or sequentially, the white cheese segment continues to form the most back up to the top-line through a rise in both prices and volumes.

White cheese volumes climbed to reach 36.3k tons for the quarter, compared to 29.8k ton in 3Q21 and 25k ton in 2Q22. While prices soared to an average of EGP35.1/Kg an increase of 35.9% YoY and 8.1% QoQ. Leading to a gross revenue of EGP1,274 mn, compared to EGP768 mn in 3Q21 and EGP810 mn in 2Q22 (+66% YoY, +57.4% QoQ). The multiple price increases implemented were to offset the rising costs of raw materials and the decrease in the value of the Egyptian pound. While the increase in volumes is backed by additional gains in the company’s market share as small players struggle to maintain their positions amidst such troubling times. Also, the company introduced several new flavors that helped support white cheese sales and grow its market share.

Milk revenues recorded EGP46 mn, a drop of 2.1% YoY and a rise of 16.5% QoQ. The milk segment has been witnessing a slowdown since the beginning of the year due to the implemented price increases and tough competition. However, what lacked in volume was compensated by price increases.

Juice sales came in at EGP22 mn for the quarter, compared to EGP31 mn in 3Q21 and EGP20 mn in 2Q22 (-29% YoY, +10% QoQ). Such a boost could be mainly attributed to their new brand “Lovely” which targets lower-income consumer segments with lower price levels compared to the original Obour Land brand.

Processed cheese was not as fortunate as the other segment by recording EGP7 mn, dropping by 14.6% YoY and 4.1% QoQ. The company introduced in October a new product of processed cheese, a 50gm SKU branded as “Mafrooda”, replacing the 100gm SKU. The new size is equivalent to four triangle cheese pieces sold at a very low price point. Management expects the new size to grow strongly and to penetrate the triangle cheese market.

9M22 revenues recorded EGP3,141 mn compared to a previous EGP2,123 mn, achieving a YoY growth of a solid 47.9%, out of which EGP2,960,7 mn generated from the cheese segment and EGP180.1 mn from the juice and milk segment.

Record-breaking revenues eaten up by inflation in costs

Gross profit recorded EGP262 mn, a rise of 37.9% YoY and 36.7% QoQ. GPM dipped to hit 19.5%, versus 23.2% recorded in 3Q21 and 21.9% in 2Q22 (-3.7pps YoY, -2.4pps QoQ). This drop is mainly backed by the inflationary pressures on materials costs, along with the on-going weakness in local exchange rate, having COGS climb at a high pace of 71.6% YoY and 58.5% QoQ.

9M22 gross profit came in EGP654 mn compared to a previous EGP502 recorded in 9M21, achieving a YoY growth of a full 30.4%. Leading to a GPM of 20.8%, versus 23.6%, a drop of 2.81pps.

Amidst an environment of rising expenses, OLFI managed to bring SG&A expenses down sequentially by 15.2%. Yet, it still climbed by 7.3% YoY. However, their percentage to sales was brought down significantly to a 4.1% in 3Q22, compared to 6.3% in 3Q21 and 7.4% in 2Q22, leading to an EBITDA of EGP214 mn, a rise of 45.5% YoY and 58.6% QoQ. EBITDA margin recorded 15.9%, versus a previous 17.9% in 3Q21 and 15.4% in 2Q22. Clearly affected by the SG&A movement to sales.

SG&A to sales was brought down during 9M22 despite the rising inflation to reach 5.9%, compared to 8.2% recorded in 9M21, a drop of 2.2pps. Reflecting on EBITDA reaching EGP492 mn, compared to a previous EGP354 mn, a rise of 39% YoY. EBITDA margin reached 15.7%, versus a previous 16.7% in 9M21, a drop of 1pps YoY.

Attributable net profit recorded a solid EGP145.7 mn, compared to a previous EGP111.2 mn recorded in 3Q21 and EGP90.2 mn recorded in 2Q22 (+31% YoY, +61.5% QoQ), backed by a trickling down of record-breaking revenues and gross profit. NPM however, witnessed a minor upward slide QoQ, while dropping YoY due to the inflationary pressures affecting mainly gross profit as well as the slowly weakening local exchange leading to FX losses of EGP9.9 mn for 3Q22, compared to losses of EGP3 mn the previous quarter and a minor FX gain of EGP0.1 mn recorded in 3Q21. NPM reached 10.8%, versus 13.6% recorded in 3Q21 and 10.3% in 2Q22 (-2.7pps YoY, +0.5pps QoQ).

Bottom-line for the 9M22 period came in at EGP327, higher YoY by 27.9% despite higher FX losses of EGP32.8 mn, compared to a minimal FX fain of EGP0.8 mn in 9M21 and higher net interest expenses by 42.1% to reach EGP15 mn. Leading to a NPM of 10.4%, versus 12% in 9M21, a drop of 1.6pps.

OLFI managed to bring down debt levels remarkably, comparable to the end of June 2022, where credit facilities were brought down from a previous EGP421 mn, to a current EGP102 mn, bringing the total current debt to EGP212 mn, compared to EGP127 mn recorded in September 2021, and EGP533 mn recorded in June 2022.

Cash increased remarkably to record EGP265 mn, compared to EGP17 mn in September 2021 and EGP27 in June 2022. This increase was mainly backed by a rise in dues to suppliers amidst the hardship faced to secure foreign currencies. Payables reached EGP415 mn by the end of 3Q22, compared to EGP294 mn recorded by 2Q22.

OLFI gains higher market share on small players shutdowns; Heightened cash & payables tied to foreign currency availability

OLFI managed to weather through a tough storm gracefully for yet another quarter. The rise in revenues backed by both volumes and prices shows resilience in the market and efficient implementation of price increases. Amidst tough environment for competition, small cheese makers are being pushed out of the market, leaving an excess market share to be captured by large players like OLFI, gaining the company a rise in selling volumes despite their gradual and on-going increase in prices. Another positive factor for the company’s sales volume is that white cheese is currently a go-to protein provider as other goods witness a massive wave of price increases. White cheese maintains its position in the consumer basket.

The net cash position of EGP53 mn recorded in September 2022, is not expected to continue once foreign currency is secured and all dues paid.

Inventory levels were brought down from EGP992 mn at the end of 2Q22, to a current EGP776 mn. This is mainly due to the depletion of raw materials secured at relatively low prices than the current ones, that helped the company maintain healthy margins for a long time. However, if difficulties faced to import raw materials and lack of negotiation power with suppliers due to the foreign currency shortages continue for a long period, inventory will be purchased at very high prices, making the company miss the opportunity of another healthy inventory cycle and eventually affecting their margins.

OLFI is currently trading at a FY23 P/E of 4.2x and an EV/EBITDA of 3.6x.