Volume slowdown hinders sales on a QoQ basis
Pachin reported 1Q19/20 results, recording sales of EGP222.4 million (-18.0% QoQ, +6.7% YoY). The company’s sales volume for paints recorded just 7,700 tons (-23.7% QoQ, +8.5% YoY) this quarter. Hence, the QoQ drop in revenue was mainly due to the slowdown in volumes, which we believe came as a result of two factors; the high demand summer season coming to an end, and the August 2019 resin plant fire hindering production. On an annual basis however, the ramifications of the fire were not felt as volumes recorded an 8.5% YoY increase.
Margins: Improve QoQ as prices edge up; Remain pressured YoY
Gross profit for the quarter stood at EGP30.0 million, translating to a gross margin of 13.5% (+2.7pps QoQ, -3.6pps YoY). We believe the improvement on a QoQ basis was mainly owed to slightly higher selling prices, as the average price for paints increased by 1.7%, and that of inks also increased by 3.6%. Margins did not however manage to recover to last year’s levels, as they continued to face pressure due to rising costs of raw materials and utilities. It is also worth noting that SG&A expenses as a percentage of sales continued to increase, reaching 11.4% (+0.7pps QoQ, +0.7pps YoY) in 1Q19/20, which reflects the company’s efforts to increase R&D and marketing.
Bottom line weakness a trend
Pachin continued to report weak net income; the bottom line reached EGP3.6 million for 1Q19/20, a net margin of 1.6% (-0.4pps QoQ, -5.3pps YoY). The slight QoQ contraction in net margin is due to a high base effect as Pachin’s 4Q18/19 bottom line included some EGP6.7 million of income from real estate investments. On an annual basis, gross margin weakness filtered down to Pachin’s bottom line, which was dragged down even further by higher SG&A expenses and lower treasury bills investment income.
Maintain Overweight recommendation on land value
Given that the company’s resin plant experienced a fire in August 2019, Pachin’s 1Q19/20 results are not as weak as we had initially expected. We await 2Q19/20 results to be able to gauge the extent to which production has been impaired by the fire, and hence whether volume recovery will be possible this year. We are also waiting to meet with management to get updated views on the strategic outlook for Pachin as we update our valuation.
We maintain our Overweight recommendation on Pachin’s land value, pending revision of our FV for operations. We remind you that we account for the 52,000 sqm land plot at a conservative EGP10,000/sqm, which yields a FV of EGP21.67/share for the land, while our FV of Pachin’s operations currently stands at EGP29.21/share. The stock is currently trading at a 19/20e PE of 26.9x, and EV/EBITDA of 6.5x, versus an average historical PE of 10.8x, and EV/EBITDA of 6.9x.