Pachin: Positive performance backed by paint segment; margins pressured by higher costs

  • Topline growth continues, backed by paint segment
  • Gross profit growth maintained; Margins under pressure
  • Bottom line rises annually, lags sequentially

Topline growth continues backed by paint segment

PACH continues achieving top-line growth on the annual and the sequential basis where revenues for 3Q20/21 came in at EGP224 million, rising by 25.4% YoY from the EGP179 million recorded in 3Q19/20, and by 7.8% QoQ from EGP208 million recorded in 2Q20/21. The growth was present on the 9M basis as well, where revenues recorded EGP640 million in 9M20/21, representing a YoY rise of 9.2% from EGP586 million recorded in 9M19/20.

9M growth in top-line came supported mainly by the paint segment, where paint sales recorded EGP551 million in 9M20/21, compared to EGP491 million in 9M19/20, a rise of 12.2% YoY. This was mainly backed by a rise in volumes from 20,897 tonnes in 9M19/20 to 23,305 tonnes in 9M20/21, rising by 11.5% YoY. While prices recorded a minimal YoY growth of 0.6%, reaching EGP23,661/tonne, from EGP23,526/tonne. Inks segment was not as fortunate regarding growth as they witnessed a YoY decline in sales by 1.5% to record EGP75 million in 9M20/21, compared to EGP76 million in 9M19/20. Despite a YoY growth in volumes by 10.5% percent, selling 1,242 tonnes, compared to 1,124 tonnes in 9M19/20, the drop came from a decline in prices by 10.8% YoY, to sell at EGP60,576/tonne in 9M19/20, after selling at EGP67,939/tonne in 9M19/20.

Gross profit growth maintained; Margins under pressure

Gross profit jumped by 130% YoY to reach EGP42 million from the previous EGP18 million recorded in 3Q19/20. The sequential rise was minor compared to the annual as it came at 3% rise QoQ from EGP41 recorded in 2Q20/21. GPM came in at 18.8% in 3Q20/21, compared to 10.2% in 3Q19/20 and 19.6% in 2Q20/21. The sequential drop of 0.9pps in GPM is backed by a 9% QoQ rise in COGS, reflecting the rise of titanium dioxide prices (one of the main chemical raw materials) by 3% QoQ. While the YoY rise in GPM is a result of the resumption of operations in Pachin’s resin factory, allowing them to reduce manufacturing costs. On the 9M basis, gross profit witnessed a strong rise of 70% YoY to reach EGP122 million, compared to EGP72 million in 9M19/20,  leading to a rise in GPM by 6.8pps YoY to hit 19% after the previous 12.3%.

On the annual basis, SG&A expenses dropped by 0.6% YoY, but rose by 11% QoQ to reach EGP24 million in 3Q20/215, with SG&A/Sales hitting 10.7%, a YoY decline of 2.8pps and QoQ rise of 0.3pps. During the 9M20/21, SG&A dropped significantly by 11% YoY to reach EGP66 million, in comparison with EGP74 million in 9M19/20, leading to a drop in SG&A/Sales by 2.3pps YoY to reach 10.3% in 9M20/21.

EBITDA came in the green with EGP18 million, after recording a loss of EGP6 million in 3Q19/20. However, on a sequential basis it dropped by 6% QoQ. EBITDA margin followed by recording 8.1% in 3Q20/21, compared to -3.3% in 3Q19/20 and 9.2% in the previous quarter. During 9M20/21 EBITDA came in at EGP56 million after a loss of EGP2 million in 9M20/21. EBITDA margin rose by 8.4pps YoY to reach 8.8% during 9M20/21.

Bottom line rises annually, lags sequentially

Net profit for the quarter recorded EGP14.7 million, compared to a net loss of EGP7 million in 3Q19/20 and a net profit of EGP15.3 million in 2Q20/21., leading to an NPM of 6.5% in 3Q20/21, rising by 2.8pps YoY and dropping by 0.8pps QoQ.

Net profit for 9M20/21 came in at EGP50 million, comparing to a loss of EGP4 million the previous year, reaching an NPM of 7.8%, a YoY rise of 7.1pps.

Upside awaits land development

Despite land development progress being unknown for Pachin’s 52,000 sqm land plot, we believe it represents a major upside potential for the stock. Management explained that the company has completed building demolition and leveling activities for the residential portion of its land plot amounting to 22,000 sqm and are currently working on land surveying. Pachin is also still working on changing the license for the remaining 30,000 sqm of land from recreational to residential as well. We reiterate that Pachin’s land, if valued at a conservative EGP5,000/sqm, could add EGP10.80/share to our EGP16.20 FV from industrial operations. PACH is currently trading at an annualized FY20/21 P/E of 7.2x.

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