Gradus

Poultry producer Gradus reported lower than expected results in FY2018. The latter was driven by both drop in revenues and one-off costs hurting the profitability. Regardless of this, Gradus’ management kept its promise to deliver above 5% return to its investors, offering a gross dividend of BGN 0.10 per share in 2018.

This is what ELANA Trading analysts say in their latest research report.

Adverse market conditions lowered sales

Gradus’ top line was hit hard by several negative events that took place in FY2018, including low hatching eggs prices in main foreign markets and bad weather affecting negatively grain harvest. To add, delayed introduction of new pork products led to meat sales staying almost flat y/y. Thus, top line shrank by 34% y/y1 to BGN 141.4m.

Geographically, local sales made up 60% of top line, followed by sales in third countries and Europe with 24% and 16%, respectively.

Investment program is moving forward

After raising ca. BGN 41m in Aug’18 in its BGN 81m public offering of both new and existing shares, Gradus invested more than BGN 6m in facilities for broilers and parent birds and introduced slow-growing chicken Le Poulet. In addition, it used part of the funds to boost its parent stocks by 50% to ca. 654k birds.

The Group, however, does not provide detailed information on spending of IPO proceeds. In 2019, plans envision further expansion in parent stocks, construction of new halls for ca. BGN 10m, ERP system and new poultry products.

One-off impairment costs weakened profitability

The increase in parent stock led to impairment costs surging to staggering BGN 10.7m. The latter was a result of Gradus following accounting standards for treatment of assets, according to which maturing biological assets that are yet to generate revenues must be impaired. Still, the Company did not disclose in detail the need for impairment. Adding the lack of one-off revenues compared to FY2017, profitability in FY2018 suffered, EBITDA plummeting almost twice y/y to BGN 22.9m and net profit being slashed almost 3x.

Hatching eggs and new products to drive growth in 2019

The management expects growth in 2019 to come from hatching eggs segment given the substantial expansion in Gradus’ parent stocks, coupled with stabilization of hatching eggs foreign markets with increase in purchase price to EUR 0.22-0.25 per egg, according to management forecast.

Recently introduced high margin chicken Le Poulet, new poultry and pork products will be other pockets of growth.

Above average return for investors

Although the Company did not manage to reach its pre-IPO targets, Gradus’ management kept its promise to deliver high return to its investors. The proposed DPS for 2018, which is based on subsidiaries’ FY2017 results, is BGN 0.10, yielding 5.68% at current quotes and 5.56% at IPO price. Currently, the yield is among the highest on the BSE market.

In addition, last year, management said it would pay an interim dividend for H1’19, which would further boost return for the year.

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