Watheeqa Stock Report
Olympic Group Financial Investments, Egypt
Please click the link below to view or download in PDF.Olympic Group – Watheeqa Stock Update (15-November-2009)
Update - 3rd Quarter 2009 ahead of expectations – Stock up 34% in four months
Olympic Group Financial Investments (OLGR) declared its third quarter results ended September-09. The company's financial performance was better than our estimates. The positive surprise emanated from improved operating efficiency by virtue of superior cost control. Traditionally, 3Qs have always remained strong owing to higher consumer spends during the festival season. Domestic sales witnessed an impressive 26% sequential growth in 3Q-09, thereby validating our belief in recovery of OLGR's revenues in 2H-09. Total revenues in 9M-09, however, was down by 11% year-on-year. Gross margins rose to 27% in 9M-09 as benefits of lower raw material percolate to OLGR's earnings. Operating margins were up by 190bps year-on-year to 13%, primarily owing to lower selling and marketing expenses. Net profit margins at 9.2% were similar to 9M-08.Our volume and pricing assumptions remain broadly in sync with OLGR's actual performance in 9MFY2009. Average selling price of OLGR's products is currently close to its FY2008 average. Exports remained a major contributor accounting for 11% of OLGR's revenues in 9MFY2009. OLGR is close to finalizing its AWM contract with Electrolux that would allow OLGR to export to Arab, African, and European markets. The contract, once operational, would aid in sustaining the momentum in OLGR's exports.
We are upgrading our earnings estimates by 9% in FY2009 and 6% in FY2010, primarily factoring in superior operating efficiency rather than any significant improvement in our revenue assumptions. Accordingly, we are revising our base case intrinsic value estimate upwards to EGP 37 (earlier EGP 30) and best case to EGP 41 (EGP 34 earlier). We now ascribe three stars to OLGR and our opinion is 'Undervalued' with a 'Medium' margin of safety rating.
We initiated coverage on Olympic in the month of July and the price then stood at EGP 23.2. We had rated Olympic with four stars and our opinion was fairly undervalued. However, post 1H-09 results we downgraded OLGR to 'Low' margin of safety rating with the market price edging closer to our base case intrinsic value estimate. The most recent stock price is EGP 31.2 per share. That's a 34% return over a period of four months. We would still continue to hold on to our position considering a reasonable 19% upside from here, based on our revised base case intrinsic value of EGP 37. However, we would further add to our position if the stock reaches EGP 29 and below.
Please click the link below to view or download in PDF.
Olympic Group – Watheeqa Stock Update (16-August-2009)
Update
Olympic Group Financial Investments (OLGR) declared its first half results ended June-09. The company’s financial performance is in line with our estimates. Revenues and net income for 1H-09 are at par with what we thought the company would achieve. Operating margins are up 180 bps at 11.3% owing to superior cost control, as against our FY2009 estimate of 9.5%. We are glad we were conservative and the surprise is on the pleasant side. Despite better operating margins – how come the net income turned out to be in line with our expectation; that’s primarily because of higher interest payments by OLGR.Our volume and pricing assumptions remain in sync with OLGR’s actual performance. Exports, as envisaged, emerged as an important contributor accounting for 11% of OLGR’s total revenues as compared to 9% in FY2008. Export revenues grew by 9% YoY, as compared to a decline of 14% in domestic sales. Nevertheless, domestic sales rose by 6% QoQ reflecting a revival in demand, underpinning our belief in recovery of OLGR’s revenues in 2HFY2009.
We maintain our full year estimates for 2009 intact and we stick to our base case (EGP 30) and best case (EGP 34) intrinsic value estimates. We initiated coverage on Olympic on the same date last month and the price then stood at EGP 23.2. We had rated Olympic with four stars and our opinion was fairly undervalued. Our margin of safety rating was ‘High’. The most recent stock price is EGP 27.6 per share. That’s a 20% return in one month. Now with the market price gradually coming closer to our base case intrinsic value estimate the margin of safety has narrowed. From the current levels the upside is 8.7% to our base case estimate. We assign a ‘Low’ margin of safety rating at current price.
Assuming we are invested in Olympic at EGP 23.2, our course of action would be to do nothing. Business fundamentals are intact – only market price has changed for the better. We would continue to hold until the stock reaches EGP 30. We will revisit and evaluate our ‘hold’ decision as and when Olympic reaches our base case intrinsic value. Till then inaction is the best course of action.
Please click the link below to view or download in PDF.
Olympic Group – Watheeqa Stock Report (15-July-2009)
Company Overview
Olympic Group (OLGR) is the largest manufacturer and distributor of white goods in Egypt with a consolidated market share of 30%. OLGR has dominant market shares locally in various products like washing machines (40%), refrigerators (25%), water heaters (47%) and cookers (17%). Washing machines accounted for 36% of its total sales in FY2008, followed by refrigerators at 31%. In terms of profitability, washing machines (45%) and refrigerators (23%) remained the largest contributors, accounting for nearly 2/3rd of OLGR’s gross profits. OLGR possesses a large network of wholesale and retail dealers – 17 owned retail outlets, 42 retail and consumer credit outlets (through its subsidiary – B-Tech) and 32 distribution centers. Further, it has 45 owned and franchisee service centers across Egypt, facilitating an effective after sales service for its customers.OLGR was established by Mr. Abdullah Sallam in 1930 for manufacturing small home appliances. In 1950, the business expanded to include retail activities related to marketing and distribution of home appliances. OLGR has undergone various restructuring throughout its operating history to emerge as one of the leading appliance manufacturers in Egypt. 1970 was a landmark year in OLGR’s history as it introduced the first locally produced electric water heater under its brand, “Olympic Electric”. In 1997, OLGR started its own distribution arm, B-Tech, which is currently amongst the largest distribution chains in Egypt. In 1998, OLGR acquired 79% stake in IDEAL, the largest local household appliance manufacturer in Egypt in a deal worth EGP 263mn. OLGR increased its stake in IDEAL further to 93% through a share swap deal in 2005. In 2007, OLGR acquired another small local manufacturer, Al Abd, a dominant player in the automatic washing machine segment.
OLGR has recently announced the acquisition of Cairo Feeding Industries (CFI) through a share swap of 1:1 where OLGR’s 2.5mn shares would be swapped with equivalent shares of CFI. The deal would give OLGR a controlling 98.8% stake in CFI. CFI owns production lines of heaters, thermostats, irons and mixers and would complement OLGR’s product portfolio. CFI’s FY2008 net profits stood at EGP 19.5mn, a whopping growth of 65% over its FY2007 net profits. It is pertinent to note that CFI enjoys tax exemptions for eight years. The acquisition seems inexpensive at a PER of 2.3x (price as on the date of AGM – March 31, 2009) based on CFI’s FY2008 earnings.
Namaa was established in 1997 under the investment law #95 for investing in the real estate sector. OLGR created Namaa for owning all its lands under management of a single entity. Namaa entered into a joint venture (Egypt Emirates Commercial Centers Group) with Maged Al-Futtaim (a major UAE group) for developing shopping malls and expanding the presence of Carrefour, the French hypermarket chain, in Egypt. Three shopping malls would be established in three prime locations in Cairo (Heliopolis, Shobra, and Nasr City), with Carrefour being the primary tenant in each of the three malls. Namaa has also entered into a Saudi-German project (23% stake) for building a hospital in Egypt. Namaa has a subsidiary (89%), OCL Logistic Services Company, engaged in construction, operation and leasing of warehouse as well as local freight and distribution services.
The recent spin-offs of Namaa (real estate business) and B-Tech (OLGR’s distribution arm) have left OLGR as a pure white goods manufacturer, allowing it to focus more on its core operations. The rationale behind spinning off the distribution arm is that retail credit might have adversely impacted OLGR’s funding profile and posed a strain on its resources in terms of managing the receivables. Post spin-off, OLGR owns 41% in Namaa and 48% in B-Tech. OLGR would have been able to bring down its ownership further had the financial crisis not coincided with the timing of the spin-off (3QFY2008), resulting in the investors opting for cash.