Equity Analysis /
Egypt

Pachin: Showing signs of recovery

    Myss Semeida

    Volumes gradually recovering as expected

    Pachin reported 3Q18/19 results, recording sales of EGP232.2 million (+8.6% QoQ, +7.5% YoY). The company’s full financials revealed that the sequential sales growth was mainly volume-driven as the volume of paints sold reached 7,906 tons (+15.1% QoQ, -2.2% YoY), and the volume of inks sold reached 418 tons (+28.6% QoQ, +32.7% YoY). This is a positive development for the company and means Pachin has actually met our expectations on the volume front for this quarter. As for prices, Pachin’s average price of paints increased by 6.7% QoQ to EGP25.50/kg, but average ink prices were down 5.8% this quarter.

    Slight quarterly margin expansion is reassuring

    Pachin’s gross margin settled at 9.6% for 3Q18/19 (+2.1pps QoQ, -6.6pps YoY). Although margins remain well below the historical average of roughly 19.1%, the 2.1pps QoQ expansion is reassuring. Following pressure from limited production in 2Q18/19 as the company moved the Al Quba plant operations to Obour, this quarter’s production levels helped margins slightly recover. The company’s 9M18/19 gross margin recorded 11.3%, which is close to our estimate of 11.6% for the full year. 

    It is also worthy to note that SG&A expenses as a percentage of sales for 3Q18/19 stood at just 9.1% (-1.9pps QoQ, -0.7pps YoY). However, as part of the company’s strategy to increase spending on marketing and advertising to regain market share, we had assumed a relative percentage of SG&A/Sales of 12.0% for the second half of 18/19. Hence, we believe this quarter’s SG&A/Sales percentage is not indicative of future spending levels.

    Bottom line only just made it back in the green

    On the bottom line level, Pachin posted net income before minorities of EGP0.9 million this quarter (-94.9% YoY), versus a loss of EGP3.9 million last quarter. We believe the company made it to the green this quarter on improved operational performance as well as lower SG&A expenses. 

    Since we were expecting another quarter of bottom line losses, Pachin has already beaten our net profit estimate for the year of EGP6.6 million, by recording 9M18/19 net profit of EGP11.3 million. Net margin for 3Q18/19 reached 0.4% (+2.2pps QoQ, -7.4pps YoY).

    Maintain Overweight recommendation on land value, FV EGP50.87

    Seeing as the fourth quarter of each year is usually Pachin’s strongest as the high demand summer season sets in, we expect volumes to ramp up further next quarter pushing sales closer to the EGP300 million mark. Hence, with that in mind, and 9M18/19 sales of EGP654.3 million, we believe the company could make it close to our sales estimate of EGP983.9 million for the year, which is slightly less than last year’s EGP1,035.3 million.

    Apart from operational developments, the company has also made progress with regards to its 52,000 sqm land plot. The company recently announced it acquired approval to convert the use of its land area from industrial to residential, and has also acquired a demolition permit to remove current buildings. Therefore, Pachin is currently in the process of real estate development of the residential area, alongside ongoing demolition activities. This is a positive development in the all-important land story, which we remind you is the basis of our Overweight recommendation. We reiterate that we currently account for the land at a conservative EGP10,000/sqm, which yields EGP21.67/share of our total FV for Pachin. If the land were to be valued at a higher value per sqm, this would result in further upside at the current market price. Pachin is currently trading at a 19/20e PE of 32.5x, and EV/EBITDA of 8.8x, versus an average historical PE of 10.4x, and EV/EBITDA of 6.8x.