13 May 2016
The company reported quite average performance in last reporting quarter, expectedly showing lower sales and profitability. On positive side is improving balance sheet structure, which provides better margin of safety for the future activity.
Revenues of Industrial Milk Company in Q1 2016 made USD 26.8 mln, which was by 17% lower than in corresponding period of previous year. Like a year ago 95% of realization made corn of previous year’s harvest. Factually in Q1 IMC sold 50% of its previous year’s end corn stock; in Q1 2015 this share was lower, but, as in our Y2015 financials analysis we estimated total corn stock (in tons) as of 31.12.15 to be by 25% lower than a year ago, in natural terms corn sales in Q1 2016 declined by 12% vs. Q1 2015 (to 168.5k tons). Moreover one can expect further decline in corn realization in natural terms in Q2: we estimate total corn stock as of 31.03.16 at approximately 180-190k tons, while a year ago it stood at 250-260k tons (it was sold in Q2 2015).
Another factor of IMC revenues reduction was decrease of average realization price per 1 ton of corn from USD 157 in Q1 2015 to USD 150, which can be considered as general market factor. Actually we see average realization price in Q1 2016 at USD 150 per 1 ton as quite good taking into account that during reporting period Ukrainian CPT corn market prices have been in range USD 135-152 per 1 ton.
Along with sales decrease IMC reported lower profitability: EBITDA margin declined from 30% a year ago to 22%, even despite higher reported income from biological assets revaluation (USD 3.3M vs. USD 1M in Q1 2015). Main reason of profitability decrease – higher positive influence of UAH devaluation on reported profitability in Q1 2015. We expect that without additional UAH devaluation such trend is to be seen for all main Ukrainian farming companies – increase of profitability during last two years driven by UAH devaluation will not be sustainable, we consider it more as accounting effect (especially if sources of operating activity financing are nominated in USD).
Disregarding profit from biological assets revaluation, EBITDA in Q1 2016 would be at USD 2.2M with EBITDA margin lower than 10%, reason – as of 31.12.15 one ton of corn stock was valued (book value, basing on our estimations) by the company at close to USD 125-130, while factual realization price in Q1 2016 made USD 150 per 1 ton (with additional logistics costs).
Additional point to biological assets revaluation, as of 31.03.16 book value per 1 ha of planted winter wheat is USD 678 vs. USD 450 a year ago, which means that the company became more aggressive with its accounting policies, which means higher current and lower future operating profits and is seen by us as negative signal.
On positive side, as of 31.03.16 total debt of Industrial Milk Company stood at USD 90.5M vs. USD 112.7M a year ago (trade payables have also been by USD 3.4M lower), which means improvement of financial standing and higher margin of safety in activity, along with it, it is far from being good, as Equity (USD 47.6M) is not sufficient to cover Fixed Assets (USD 82.3M), which we would see as some measure of financial stability for non-diversified and not vertically integrated farming company.