Earnings Report /
Egypt

Obourland: Q2 20 – Solid top line performance and broadly stable margins drive stability

  • White cheese and juice and milk sales saw an improvement owing to the production lines upgrade and price promotions

  • GPM gained c3ppts yoy on the back of favourable raw material prices and efficiency measures

  • Bottomline was pressured by a higher interest expense and FX losses

Al Ahly Pharos Securities Brokerage
11 August 2020

Volume-driven increase in the cheese & milk segments

OLFI recorded a topline of EGP666 million in 2Q20, up 8.9% YoY and 14.3% QoQ, and 3% higher than our estimate for the quarter. White cheese volumes increased by 6.0% YoY and 12.8% QoQ to 26.4k tons, while average selling price increased by 3% YoY and 1% QoQ over the same period. The juice & milk segment’s revenues (5% of 1Q20 sales) saw a sharp increase of 36% YoY and 22% QoQ, as a result of a greater focus on the milk segment which offset the contraction in juice volumes across the market. Additionally, OLFI reduced the prices of both milk and juice products in order to boost sales and remain competitive.

Healthy operating margins, despite below the line pressures

OLFI was able to reap the benefits of its investments in upgraded production lines and stocking-up on raw materials at favorable prices in the beginning of the year, to record a GPM of 23.1% (+2.7pps YoY but -1.5pps QoQ). EBITDA margin recorded 18.0% in 2Q20 (+1.5pps YoY and +0.6pps QoQ), driven by the sequential improvement in SG&A Expense/Revenues to 7.5% (+1.7pps YoY but -2.5% QoQ). Attributable net profit recorded EGP72 million (-3.2% YoY but +5.7% QoQ), translating into a NPM of 10.8% (-1.3pps YoY and -0.9pps QoQ). Bottom line was impacted annually by i) an FX loss of EGP4 million in 2Q20 vs a gain of EGP9 million in 2Q29 and ii) a higher net interest expense on the back of a YoY increase in net debt by c.EGP104 million to accommodate higher working capital needs. However, the magnitude of increase in finance charges was cushioned by the rate cuts that took place over the same period.

Maintain Equalweight on low diversification and low liquidity

OLFI should benefit from better seasonality in 2H20, which coincides with higher consumption during the summer and back to school seasons, which could in turn aid the company in deleveraging its balance sheet. In addition to this, we expect 3Q20 results to show a sequential improvement inline with the rebound in juice sales as the company moves towards diversifying its product portfolio, in addition to reaping the full benefit of the 300bps cut in interest rates and subsidized loans by the CBE. 

However, given the lack of short-term catalysts, low product portfolio diversification and low liquidity, that is in addition to the recent recovery in share price performance, we maintain our Equalweight recommendation on the stock with a potential upside of c.19% from current pricing. OLFI is currently trading at a 2020e P/E of 8.3x and EV/EBITDA of 4.3x, which is cheaper than peers, excluding the difference in liquidity.