Equity Analysis /

Obourland: Stable 1Q21 performance despite commodity hikes, due to raw materials management

  • Solid annual growth of topline driven by white cheese segment; Milk and processed cheese witness remarkable growth

  • Raw materials management stabilizes margins

  • Maintain Equalweight and FV at EGP7.50/share

Solid annual growth of topline driven by white cheese segment; Milk and processed cheese witness remarkable growth

OLFI recorded a topline of EGP664 million for 1Q21, down 4.5% QoQ but up 13.9% YoY; in-line with our expectations of EGP652 million. Sales volume of white cheese increased by 2.5% QoQ and 5% YoY to 24.6k tons. Moreover, average selling price of white cheese increased by 4.6% YoY to EGP24.8/kg. Management succeeded in implementing price increases gradually so that volumes were not affected and margins were maintained. Milk gross sales increased by a remarkable 93% YoY to EGP49 million consisting 7.2% of OLFI’s gross sales compared to 4.2% only in 1Q20. Flavored milk was introduced in 2020 to support OLFI’s milk market, diversify its milk portfolio, and acquire younger group age.

Juice gross sales fell by 12% YoY to EGP7 million. This is because the juice segment has been hardly hit by pandemic and closure of schools and universities as well as the strong price competition in the market. However, OLFI is developing a new strategy for the juice segment that will be put in place in 2021. Concerning the processed cheese gross sales, it recorded EGP8 million compared to EGP3 million in 1Q20 with a 213% increase YoY. This increase came on the back of the strong performance of the glass-jar product in addition to the introduction of the new product “Mafrooda” which was launched in October. OLFI expects to continue achieving much higher growth rates as it focuses on the new Tetra Pak product “Mafrooda” and introduces new innovative flavors.  

Raw materials management stabilizes margins

Gross profit for the quarter amounted to EGP157 million, down 8.9% QoQ but up 9.1% YoY. GPM of 1Q21 is 23.6% (-1.2pps QoQ and -1.0pps YoY). This is because of the surge in almost all raw material prices in the past months pressuring the GPM; however, management’s purchasing policies succeeded to relieve this pressure by securing inventory from last year with lower prices. OLFI targets to improve GPM of juice and milk to be above 20% by 4Q21.

EBITDA for the quarter recorded EGP99 million, up 6.0% QoQ but down 2.3% YoY. EBITDA margin amounted to 14.9% in 1Q21 compared to 13.4% in 4Q20 and 17.4% in 1Q20. SG&A as a percentage of revenues dropped QoQ from 11.3% in 4Q20 to 10.1% in 1Q21 and was flat YoY.

Attributable net profit for 1Q21 amounted to EGP69.8 million, down 4.3% QoQ but up 2.6% YoY. NPM was 10.5%, flat QoQ but -1.2pps YoY. This came in-line with our expectations of EGP68 million.

Maintain Equalweight and FV at EGP7.50/share

Strong performance for OLFI is expected to continue in 2021 with bottom-line of EGP320-330 million and NPM of around 11% for the full year 2021. Management intends to develop a new plan for the juice segment during 2021. This will probably include changing the size of the pack from 250mg to 200mg for juice and flavoured milk in order to compete with lower prices in the market. OLFI expects the farm to be fully operational in October/ November 2021 with capex of EUR2 billion and it should cover 25% of OLFI’s milk needs for the packaged milk products. Also, management plans to offer more trade discounts for consumers in the processed cheese segment to encourage higher market share. It is noteworthy that the company will study implementing price increases of 1.5-2% in case prices of raw materials remained high.

OLFI is currently trading at a 2021e P/E of 8.0x and EV/EBITDA of 5.2x.