QNBFS upgrades Baladna to outperform as volumes grow
QNB Financial services (QNBFS) recently announced that it has upgraded Baladna, Qatar’s largest locally-owned food and dairy producer, from accumulate to outperform.
In a company report published recently, QNBFS said, “We upgrade our call to outperform from accumulate but maintain our 12-month TP of QR1.767, implying a 52.5 percent upside potential. The stock has been under pressure for months and we believe this set of results could spark a re-rating. Our primary thesis is that, internally, the headway for volume growth is supported by ample manufacturing capacity and low market shares in select product lines. Inorganically, the scope to export its model creates PE-like payoff optionality. We also note that while Baladna’s capital return ratios are relatively low, they should gradually improve as plant utilisation increases and capex normalises.”
In the medium term, QNBFS said, “We see margin expansion from increased capacity utilisation, as volumes grow, coupled with the benefit of declining soft commodity prices. We see a gradual decline in finance costs from FY2024 as the group gradually pays down its debt while capex normalization boosts FCF. Re-negotiation of finance terms during 3Q2023 also helps to keep finance costs manageable for the foreseeable future. Increasing FCF should be used to reduce the debt burden and to continue increasing distributions to shareholders.”
“Baladna has been on a heavy investment cycle since it expanded operations in 2017, but we see capex requirements subsiding in the near term, which bodes well for its valuation and investor perception,” it said.
Commenting on the financial result of the company announced recently, QNBFS said, “Baladna’s 4Q2023 attributable profit beat our estimate primarily due to a fair value gain on financial investments even as normalised margins printed lowerthan-expected. While revenue rose a tad less than we had forecasted, the group managed to grow its local market share by 2.5ppts to 53.5 percent on strong volumes in both the HORECA and retail sales channels.”
In a show of confidence by the board in Baladna’s future cash-generation prospects despite an elevated debt profile, it said, “Baladna’s declared dividend was more than 100 percent of earnings, translating to a yield of 6 percent against QSE’s 4.8 percent. This should please investors as it is significantly ahead of our expectations and could see a re-rating of the stock. We therefore upgrade Baladna from accumulate to outperform but maintain our TP that implies upside potential of 52.5 percent.”
It said, “Baladna’s 4Q2023 attributable profit jumped 80.3 percent/102.5 percent YoY/QoQ to QR45.1 million, handily beating our estimate of QR28.5 million. While GP margins came in lower, the beat is mainly due to a fair value gain on equity investments, which jumped to
QR27.9 million from a fair value loss of QR10.7 million in 4Q2022 – otherwise it would have been a miss when adjusted for this gain.
“We had not modeled in any fair value gains/losses in 4Q specifically given the foreign exchange (downside) risks associated with its Egyptian Juhayna investment. GP margin printed at 17.1 percent against 21 percent expected and lower than both 4Q2022 (26.1 percent) and 3Q2023 (20.1 percent). With no granular quarterly data provided on cost of sales we extrapolate from annual numbers that GP margin was primarily weighed down by cost of dairy milk & packaging material and cost of sale of livestock – we need more color from management on why this is the case. Meanwhile, cost of feeds came down as expected, in line with the stabilisation in commodity prices.”
While other income came in-line, it said, “Both G&A and S&D expenses were lower than expectations which helped to stem the contraction in both EBITDA and operating margins. Operating margin came in at 10.9 percent against 14.2 percent expected. Finance costs and income tax came in line.”
It said, “Baladna’s 4Q2023 revenue rose 2.6 percent /11 Baladna YoY/QoQ to QR284.1 million, below our expectations of QR298.9 million. The YoY positive print is remarkable considering the high base set by the World Cup in the base quarter. Dairy sales rose 11 percent/9.2 percent YoY to QR252.3 million against our estimate of QR265.7 percent. Juice sales increased 9.6 percent YoY but decreased 1.5 percent QoQ to QR18.4 percent and considerably softer than QR20.1 million expected.”
“The board recommended a 121 percent dividend payout ratio for FY2023 on the back of QR109.6 million in attributable profit for the year, an increase of 35.7 percent from FY2022. This is supported by strong cash flows from operations as well as Baladna’s heavy investment cycle coming to an end. Revenue for the year rose 7.2 percent to QR1.1 billion. FY2023 EPS was QR0.0577 up from QR0.0424 and a dividend of QR0.0695/share was recommended by the board, almost double the QR0.0370 we had penciled in,” it said.
The report said that market share gains, new product launches, moderating feed costs, advanced manufacturing capabilities, fruition of international expansion plans including exporting the “Baladna Model” will further boost the company in the medium term.