Avangardco reports weak 3Q14 operating results

The second-biggest egg producer globally, Avangardco (AVGR LI), released its trading update on Oct. 24 showing a double-digit decrease in all of its 3Q14 operating figures. The company’s laying hen flock decreased 31% YTD (25% yoy, 19% qoq) to 18.5 mln, as of end-September, which the company attributes to its decision to not renew the flock at its farms in the Donetsk and Luhansk regions.

The company’s egg output fell less dramatically than its flock in 3Q14, or -18% yoy to 1.43 bln units, remaining flat yoy in 9M14 (at 5.11 bln units). Sales of shell eggs decreased just 11% yoy (to 1.10 bln units) in 3Q14, mainly fueled by higher exports (up 43% yoy to 0.15 bln units), while domestic sales decreased 17% yoy. We estimate the average price of a shell egg increased 12% yoy in 3Q14 to UAH 0.78.

A more dramatic decline happened in Avangardco’s egg products segment in 3Q14: volumes of egg processing decreased 42% yoy to 0.32 bln units, while output of dry egg products plunged 44% yoy to 3.7 kt. In 9M14, Avangardco reported a 20% yoy increase in egg processing (to 1.52 bln eggs) and 15% yoy increase in dry egg products output (to 17.7 kt). The company provided no price trend in its egg products segment this time.

Alexander Paraschiy: There are two disturbing trends from the company’s operating update: 1) the decrease in its laying hen flock by about 8.5 mln YTD, which cannot be explained solely by the Donbas factor (the total laying hen capacity of Avangardco in the war-torn regions was 6.0 mln, and the total laying hen population was 5.6 mln as of end-2012); and 2) the radical decline in output of egg products, all produced in western Ukraine and more than 70% being exported. The latter can be explained by turmoil in the company’s core export markets like Iraq, while we do not see adequate explanation for the former trend.

On top of that, we are concerned about Avangardco’s achieved prices for shell eggs. Official statistics in Ukraine suggest that average egg prices increased 21% yoy in 3Q14, and it broadly matches our feeling on where prices should be. Instead, Avangardco’s data indicated only a 12% yoy growth in the quarter, against the backdrop of an increased portion of better-priced, branded eggs sold.

The provided operating data suggests that Avangardco’s 2014 egg output will  be smaller yoy, and its financial performance will be much worse that for Ukraine’s egg industry and the company’s listed peer, Ovostar Union (OVO PW).