Avangard faces a 17% yoy decline in EBITDA in 1Q14

The largest Ukrainian eggs producer Avangardco (Avangard, AVGR LI) reported a 2% decrease in revenue to USD 152 mln in the 1Q14, according to its interim statement released on May 23. The decline was mainly caused by a 14% yoy decrease in revenue in its flagship Shell Eggs segment to an estimated USD 95.6 mln. This was a result of smaller volumes of shell egg supplies (due to heavier egg processing), smaller prices on the local market (where 87% of eggs were sold), as well as devaluation of the hryvnia. Avangard decreased sales of shell eggs 4% yoy to 1.264 bln pieces, and its average price for an egg fell 1.5% yoy to UAH 0.67.

Avangard’s revenue in Egg Products segment doubled yoy to USD 51.3 mln in 1Q14. The company increased the volume of eggs processed 115% yoy to 584 mln pieces, as capacity of its processing plant has been increased after modernization. It produced 6.8 kt of dry egg products (+100% yoy) and sold 7.3 kt of dry egg products, by our estimates (+119% yoy). The products’ average sale price has dwindled 7% yoy to USD 7.04/kg.

The company has managed to increase export sales 71% yoy to USD 61.6 mln in 1Q14 (to 43% of its quarterly revenue). 

The company reported a 17% yoy decrease in EBITDA to USD 60.9 mln in 1Q14. The EBITDA margin fell to 40% in the quarter, compared to 47% in 1Q13. Net profit has followed the EBITDA’s pattern and declined 23% yoy to USD 47 mln. 

The total debt of Avangard increased 4% YTD in 1Q14 to USD 336 mln, while net debt fell 5% YTD to USD 157 mln. The total Debt to LTM EBITDA stood at 1.15x as of end-1Q14, according to the company. 

Alexander Paraschiy: The company’s 1Q14 operating profit looks disappointing, especially if we compare it to the results of Avangard’s smaller peer, Ovostar Union (OVO PW), which had earlier reported a significant increase in its EBITDA margin. We expect that the next quarter will be much better for Avangard as we are observing a significant yoy increase in domestic egg prices. Further growth in domestic food prices this year will follow a higher price for the U.S. dollar. We expect that this will allow Avangard to make up for the 1Q14 decline in the following quarters.

A worrying signal is that Avangard reported a decrease in its laying hens flock (to 26.5 mln heads from 27.0 mln as of end-2013), which does not look consistent with the company’s growth strategy. 

The core risk to Avangard’s business right now is related to turmoil in Eastern Ukraine. We estimate that the facilities located in the Donetsk and Luhansk regions account for 18% of Avangard’s total egg production capacity. We do not believe the operations of facilities in the hot regions will be affected by the turmoil (demand for food is still there). However, the continuation of unrest may harm operations there due to the possible emergence of logistical problems.