Apex Frozen Foods: Strong Q3; assign Reduce on rich valuations | Apex Frozen Foods Q3FY18 | Quarterly Results | Indianotes.com

Apex Frozen Foods’ (AFFL) reported revenues of Rs 2,628mn (in line with our estimates) and an above-expected 3QFY18 PAT (+34% above EE) led by better margins and higher other income. Gross margins for 9MFY18 touched ~29% (historical range: 24-25%) helped by (a) a higher pricing spread between raw and processed shrimp,(b) a change in the accounting policy of export incentives from cash to accrual basis. Underlying demand for Indian shrimps remains strong and AFFL’s processing plants worked on ~94% utilization in 3QFY18. With a new plant likely to be operational in 2QFY19, volume growth is expected to remain steady. We revise our FY18/FY19 EPS by +16%/+20% to factor in the strong beat. Accordingly, we revise our Mar’19 TP to Rs 700 (Mar’19 TP of Rs 570 earlier) set at a TTM P/E multiple of 25x, and assign Reduce rating on rich valuations.

Strong topline growth in line with Indian shrimp exports to US: The year 2017 has been very good for Indian shrimp exporters as global demand for shrimps remained strong. India gained further market share and contributed 32% to overall US imports in 2017 (2016: 25%). For 9MFY18, Indian shrimp exports grew 47% yoy in value terms, and AFFL’s revenue growth (+49% yoy in 9MFY18) grew broadly in tandem. The 20,000MTPA new processing plant remains on track to begin commercial operations by 3QFY19. Due to seasonality of the business, we build in 75% utilization in Q4, implying effective utilization of ~92% in FY18E. In FY19/FY20, we estimate 52%/76% utilization of the total annualized capacity of 35,240 MTPA/29,240 MTPA (Exhibit 1). Overall, we expect 35% revenue CAGR over FY17-FY20E.

EBITDA margins improve to 11% in 9MFY18 (+475bps in 9MFY17): EBITDA per kg for AFFL improved to Rs 84 in 3QFY18 (vs. Rs 75 in 1HFY18), mainly due to (a) a higher spread between prices of raw and processed shrimps (Exhibit 3, 4), (b) high utilization rates which led to cost efficiencies, and (c) a change in accounting policy of export incentives (MEIS or Merchandise Exports Incentive Scheme) from cash to accrual basis which led to benefits of Rs 70.7m in Q3. Excluding this benefit, APEX would have reported EBITDAM of ~9%, in our view.

Mar’19 TP raised to Rs 700; assign Reduce on rich valuations: At current price of Rs 782, APEX is trading at 35x/28x on our FY18/FY19 EPS estimates. We have updated our FY18/FY19 EPS estimates by +16%/+20%, mainly factoring in the beat in Q3 and change in accounting policy of export incentives. Accordingly, we update our Mar’19 TP to Rs 700 (vs. Mar’19 TP of Rs 570), ascribing a TTM target multiple of 25x (unchanged) on our Mar’19 EPS estimate. We remain positive on the sector and the company but assign Reduce rating on rich valuations and await better entry points.

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