Ovostar 2018 trading update implies weak 4Q18 operations

The laying hen flock at Ukrainian egg producer Ovostar
Union (OVO PW) fell 3.6% yoy to 6.38 mln as of end-2018, according to its Jan.
24 trading update. Its egg output fell 2.0% yoy to 1.625 bln units in 2018.
Shell egg sales rose 15.6% yoy to 1.381 bln, while its average egg price jumped
15.5% yoy to USD 0.067 in 2018. Ovostar’s sales of liquid egg products
increased 6.7% yoy to 12.27 kt and their prices increased 16% yoy to USD
1.45/kg in 2018. Its sales of dry egg products dropped 17.8% yoy to 2.71 kt,
while their prices increased 12% yoy to USD 4.84/kg.

The company’s annual results imply that in 4Q18,
Ovostar produced 0.423 bln of eggs (2.4% yoy higher) and sold 0.325 bln in
shell eggs (11% yoy lower) at an average price of USD 0.067 (12% yoy lower).
Its 4Q18 sales of liquid egg products decreased 9% yoy, while prices were flat
yoy in USD terms. Sales of dry egg products fell 55% yoy and their prices rose
13% yoy in 4Q18 in USD terms.

Alexander Paraschiy: The results
imply Ovostar’s 4Q18 revenue reached USD 29.5 mln (down 24% yoy) and its 2018
revenue was USD 124 mln (up 26% yoy).

The weak 4Q18 operating results look worrying as the
fourth quarter is typically the strongest for egg prices and sales in Ukraine.
For instance, in 2016-2017, Ovostar generated 31%-39% of annual revenue and
41%-54% of annual EBITDA in the last quarter. This time, it looks like the 4Q
contribution to the company’s annual revenue will be less than 25%, while the
quarter’s contribution to EBITDA will be also rather weak. In turn, we see a
high likelihood that Ovostar’s EBITDA will fall yoy in 2018, even though in
9M18 it reported a 42% yoy EBITDA surge.

We expect a negative market reaction to the company’s
trading update, keeping our overall neutral view on Ovostar stock.