Ovostar reports strong 1H12 results, product prices below Avangard

Ovostar (OVO PW), a Ukrainian egg producer, reported a 26% yoy increase in net revenue to USD 27.8 mln in 1H12. Key growth components were an increase in shell egg prices (+12% yoy to USc 8.2/piece) and the introduction of a new sunflower oil segment (+USD 2.0 mln to sales). The company increased its total flock 39% yoy and raised egg production 12% yoy to 324 mln units. Ovostar sold 266 mln shell eggs – flat yoy, due to the redirection of the rest of its eggs for reprocessing. Revenue from dry egg product sales decreased 33% yoy (to USD 2.1 mln) on a decrease in volumes due to the reconstruction of processing facilities, while revenues from liquid egg products increased 58% yoy (to USD 4.1 mln). EBITDA increased 43% yoy to USD 27.8 mln and net income advanced 42% yoy to USD 12.2 mln. EBITDA margin improved 6 pp yoy to 47%. The company also stated it is planning to complete an investment program (highlighted during its IPO) by September 10.

Alexander Paraschiy: While the company reported encouraging results for 1H12, we warn that its profitability might decline significantly in 2H12 on growing soft commodity prices, which will add significantly to Ovostar’s COGS. Notably, the implied shell egg price for Ovostar was UAH 0.655/piece, which is less than its peer Avangard (AVGR LI) reported (UAH 0.670/piece), and this is despite Ovostar selling 84% of its products via modern retail chains and own POS (vs. just 31% for Avangard). This again questions the liability of Avangard reporting. The difference in the dry egg pricing is even more pronounced: USD 5.4/kg for Ovostar vs. USD 7.5/kg for Avangard – we admit that in this case some part of the difference might be explained by Avangard’s better established Avangard’s sales infrastructure in this segment.