Avangardco bottom line halved, 1H14 free cash flow boosted

Ukraine’s leading egg producer Avangardco (AVGR LN, AVINPU) reported a 14% yoy drop in net revenue to USD 262.7 mln in 1H14, caused by declines in its shell eggs segment (due to a 4% yoy decrease of deliveries, in volume terms). Its cost of sales decreased less sharply, -7% yoy in USD terms, causing the company’s gross profit to fall 32% yoy to USD 80.8 mln. The company reported its EBITDA fell 41% yoy to USD 79.0 mln in 1H14, driven by a USD 29.8 mln yoy increase in other operating expenses, most likely related to exchange losses (the company did not specify). The company’s 1H14 bottom line fell 51% yoy to USD 52.0 mln.



At the same time, Avangardco’s operating cash flow improved 34% yoy to USD 106.2 mln in 1H14, mainly due to decreased investments in its working capital by USD 39.0 mln yoy. The company’s CapEx also decreased considerably (2.3x to USD 33.6 mln) as it has completed all its ambitious projects.



Despite better free cash flow, the company increased its borrowing in 1H14 as gross debt advanced USD 19 mln YTD to USD 342 mln. The company’s cash position advanced USD 79 mln YTD to USD 236 mln.

The company sees that its 2014 shell eggs output will “not exceed” its 2013 result (it was 9% higher yoy in 1H14) as it faces difficulties with the operation of its Donbas-located factories, as well as sees falling domestic demand for its eggs due to the war in Donbas and the loss of the Crimean market. The company plans to focus on increased sales of branded eggs, as well as the development of new export destinations for its eggs and egg products in 2H14.



Alexander Paraschiy: After the company published its weak operating results for 1H14, no one was expecting good financials for the period. Though, what looks particularly strange for Avangardco is it’s EBITDA margin (30% for 1H14). While it usually had been better than its peer Ovostar, it was much smaller in 1H14 compared to Ovostar’s margin of 39% this time.



Now the main question is whether the company will fulfill its promise to pay 25% of last year’s income as dividends, the probability of which we see as very low now. Also it looks a bit strange that the company is accumulating enormous amounts of cash, even though it has no large investment projects in its pipeline.



Thinking optimistically, we can expect this cash will be used to pay dividends (USD 59 mln total, if a 25% payout ratio will be confirmed) and repay a USD 200 mln Eurobond next year. Coming back to earth, we suspect that the company may use its cash to finance its parent company, Ukrlandfarming (UKRLAN), which has much higher leverage than Avangardco does.

Источник: Конкорд Капитал