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[BUY] Avangard: revision of target price (December 1, 2014)

Avangard [AVGR LI], a leading egg products and shell eggs producer and exporter in Ukraine, published its financial results for 9M2014 last Friday. The company’s revenues fell by 24% y/y to USD 355 mn, while Avangard’s gross profit declined by 45% y/y to USD 102 mn. At the same time, the company’s EBITDA decreased by 47% y/y to USD 109 mn, which was mainly caused by the devaluation of the Ukrainian hryvnia and a drop in demand for shell eggs in Eastern Ukraine due to continuing conflict in the area. Avangard’s net loss for the period amounted to USD 6 mn, including a one-off impairment charge of USD 26 mn (non-current assets), and USD 49 mn of FX losses.

The company’s revenues from the export of shell eggs increased by 18% y/y to USD 50 mn in 9M2014, while total segment sales were down by 26% y/y to USD 226 mn. During the period Avangard reported an increase in sales of packaged shell eggs under its own brand “Kvochka” by 5x to 160 mn pieces.

The company’s revenues from dry egg products decreased by 3% y/y to USD 85 mn, which was caused by a decrease in sales to Jordan in 3Q2014 due to military conflict in Iraq, according to the company’s statement. Total segment revenue in 9M2014 amounted to USD 103 mn.

Net cash flow from operating activities amounted to USD 31 mn, down by 71% y/y, which was caused by an increase in trade receivables as a result of the extention of payment period, decreased profitability, and a slight increase in inventories. Avangard’s capital expenditures declined by 70% y/y to USD 55 mn due to the completion of the company’s investment program. The company’s cash balance as of 30.09.2014 amounted to USD 158 mn, while Avangard’s net debt amounted to USD 187 mn, implying a net debt/LTM EBITDA ratio of 1.69x.

Our view:

The news is NEGATIVE for the company. Continuing conflict in Eastern Ukraine, as well as devaluation of the local currency, resulted in a decrease of the company’s domestic sales, which in turn led to a drop in Avangard’s profitability. However, we expect the domestic egg prices to increase in 4Q2014 due to seasonal factors and rising inflation, which will improve the company’s profitability and EBITDA margin for the full year of 2014. Moreover, increasing export sales, as well as growing sales of the company’s branded products segment could lead to a further increase in EBITDA margin.

We reiterate our BUY recommendation with a target price of 11.23 (vs. a previous target price of 16.44), implying an upside of 134% to the current market price of USD 4.80 per GDR.  

For more information on the company, please refer to our Initiating coverage report on Avangard dated October 22, 2014.


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The UX index remained unchanged on Friday as well as the PFTS index due to holidays. The WIG-Ukraine index increased by 0.6%. On the interbank exchange market, the UAH/USD remained unchanged too at UAH 26.10 (mid price), according to Thomson Reuters. The official exchange rate reported by the NBU was UAH 26.35.

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