Earnings Report /
Egypt

Obourland: Q1 20: Strong margins overshadow seasonal weakness; maintain Overweight

  • OLFI recorded topline of EGP583mn in Q1 20 (+1.2% yoy and -12.6% qoq) driven by seasonally low volumes

  • GPM came in at 24.6% (+4.6ppts yoy and +5.6ppts qoq) largely due to the decrease in industrial and running costs

  • OLFI is trading at a 2020 P/E of 8.3x and EV/EBITDA of 5.9x; maintain Overweight, FV of EGP7.25/share

Al Ahly Pharos Securities Brokerage
16 April 2020

Q1 20 volumes dragged by seasonality and capacity constraints

OLFI recorded a topline of EGP583 million in 1Q20, up 1.2% YoY but down 12.6% QoQ. White cheese volumes during the quarter contracted by 2% YoY and 10% QoQ as utilization was constrained by the installation of the company’s new filling and processing machinery. Management indicated that the maintenance works will be completed during April 2020, and accordingly production will reach full capacity during the 2nd quarter in order to support the expected surge in white cheese demand by 3Q20. It is worth noting that the 1st quarter is usually a seasonally low quarter for white cheese sales and annual growth was solely driven by the blended 4% price hike enacted in 2019.

The Juice & Milk segment revenues (5% of 1Q20 sales) saw a decline of 3.7% YoY and growth of 8.2% QoQ during 1Q20, largely dragged down by the annual and sequential decline in the juice segment as a result of seasonal factors. Hence, the company is planning to reduce juice prices during 2Q20 to increase their competitiveness with other brands. As for the milk product, Obourland plans to capitalize on the rising demand for milk by: 1) introducing a “flavored milk” product in a 200mg Tetra Pak packaging to diversify the milk’s product portfolio and to target a younger age group and 2) offering incentives to traders in order to boost retail sales. 

Efficiency gains boost margins across the board

1Q20 GPM came in at 24.6% (+4.6pps YoY and +5.6pps QoQ) largely due to the decrease in industrial and running costs as result of the installation of the new Tetra Pak production lines in addition to the discount received on the new package design. Margins are expected to further improve over the course of FY20 as a result of the purchase of relatively cheap raw material, mainly SMP, butter and oil, which is expected to kick-in by 3Q20. 

EBITDA margin recorded 17.4% in 1Q20 (+5.1pps YoY and +4.7pps QoQ), despite the growth of the SG&A Expense/Revenues to 9.9% 1Q20 versus 9.6% in 1Q19 and 8.4% in 4Q19. The increase is SG&A expense comes as a result of a +3.3% YoY hike in advertising expense following a period of no promotional campaigns during FY19.

FY19 NPM recorded 11.7% (+2.5pps YoY and +8.5pps QoQ) reflecting the expansion in EBITDA margin. 

Stocking-up raises working capital and ST debt 

During the quarter, OLFI recorded higher cash conversion cycle to 107 days in 1Q20 from 72 days in 1Q19 as a result of a EGP135 million YoY increase in inventory taken as a precautionary measure against any future raw material shortages and/or FX volatility. This has also reflected in a hike in net debt to EGP334 million (0.8x EBITDA) versus a net cash of EGP50 million a year ago, on the back of a EGP200 million YoY increase in the company’s overdraft balance. Still, the 300bps interest rate cut should offer the company some relief in case the increased leverage sustains until the end of FY20.

Maintain Overweight on FV of EGP7.25/share

Although 1Q20 results were partially driven by the irrational buying of consumer during the second half of March, we expect some impact on 2Q20 as well in case quarantine period is extended, but bearing in mind that 2Q20 will reflect slower volumes because of Ramadan. We also expect margins to strengthen over the course of FY2020, as the company reaps the benefits of more efficient production lines and lower commodity/raw material prices, as well as the interest rate cut.

OLFI is trading at a 2020 P/E of 8.3x and EV/EBITDA of 5.9x.