Miss on margins, new plant & valuations give comfort; maintain LONG
Apex Frozen Foods’ (APEX) 1QFY20 revenues declined 7% yoy to Rs 2.22bn (in line with EE) off a high 1QFY19 base which saw one-off export incentive refunds of Rs 110mn. Export volumes and realizations were broadly flat for 1QFY20 as capacity utilization improved to 95% (vs. 69% in 4Q and 80% in 3Q). EBITDA margins contracted 796bps yoy to ~5.5% (-393bps vs EE) on already-contracted export prices and a spike in RM prices due to lower availability. The company’s new 20,000 MTPA plant is ready but the commercial productions would start in 3Q. We pare FY20/FY21 EPS by 21%/19% to factor in 1) miss in 1Q numbers 2) reduction in MEIS incentives to 5% (vs 7% earlier) and 3) delay in commissioning of the new plant. Our Sep’20 TP of Rs 480 (rolled over from a Jun’20 TP of Rs 500) is set at 15x TTM P/E (unchanged). Maintain LONG on cheap valuations and strong earnings growth expectations from the new plant.
Sales in line but low availability of preferred shrimp sizes hurt margins:
APEX clocked volumes of 3,606MT in 1QFY20 with ~95% capacity utilization (owned + leased) vs. 3,680MT in 1QFY19 (-2% yoy) and 2,616MT in 4QFY19. Average realizations were also stable at Rs 570/kg. EBITDA margins however tanked to 5.5% in 1QFY20 vs. 9% in 4QFY19 and 11.4% (adjusted) in 1QFY19. According to management, lower availability of preferred shrimps pushed up farm gate prices, which the company was unable to pass on as export prices had already been contracted earlier. EBITDA per kg fell to a record low of Rs 34/kg (4Q: Rs 57/kg).
New plant ready but commercial production to begin in 3Q:
Management highlighted that the new 20,000MTPA plant is ready, and set to begin trial production in Aug’19; commercial production would begin once regulatory approvals are in place. It is to be noted that this new plant has 5,000 MT of Ready to Eat (RTE) capacity, which would boost FY20E margins by 100bps-150bps.
Maintain LONG with a rolled over Sep’20 TP of Rs 480:
We cut our FY20/FY21 EPS estimates by 21%/19% to factor in the
1) miss in 1Q numbers,
2) reduction in MEIS incentives to 5% ( vs 7% previously) and delays in new plant commissioning. We roll over to a Sep’20 TP of Rs 480 (from a Jun’20 TP of Rs 500) set at 15x TTM P/E (unchanged) while maintaining LONG on the stock.
(1) Demand scenario in the US remains weak.
(2) Lower capacity utilization of the new plant due to any supply constraints in India 3) MEIS incentives reducing further.
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