Equity Analysis /
Egypt

Juhayna: 1Q19: Positive topline performance, cost pressures bite margins – maintain Equalweight

    Farida Salama

    Resilient topline on price increases 

    JUFO recorded a topline of EGP1,734 million in 1Q19, up 1.3% QoQ and 11.6% YoY. Annually, topline growth was both volume and price-driven (the segregation was not disclosed by the company), but the sequential stability resulted from the drop in volumes as a result of implemented price hikes. The company implemented the following quarterly price increases: 1) 10% for yoghurt, 2) 5% for juice, 3) 2% for dairy. All segments witnessed revenue growth YoY and QoQ, except for a 2% QoQ drop in the yoghurt segment (following the implemented price hike in 4Q18), and a 16% drop in the concentrates segment YoY. 

    Margins squeezed by higher raw materials cost and income tax burdens 

    GPM dropped to 29%, down 1.9pps QoQ and 0.9pps YoY, due to 1) COGS growth (+13.1% YoY) outpacing revenue growth (+11.6% YoY), following higher global SMP prices (+22% QoQ in 1Q19, to average USD2,431/ton) and higher raw milk prices, and 2) a gradual price increase strategy, which did not yet fully absorb the raw material cost pressures. EBITDA margin came in at 15.6%, up 1.9pps QoQ and down 0.9pps YoY. The quarterly improvement came on the back of a 2.3pps drop in SG&A/revenues and a 30.4% drop in 'other expenses'. Annually, EBITDA margin dropped on a higher general and admin expenses in addition to board remuneration expense. NPM recorded 4.1%, down 1.1pps YoY as 1) JUFO’s previously tax-exempt subsidiaries are now subject to income tax (following a 5-year tax exemption), resulting in a 111.4% YoY increase in income tax, and 2) 5% YoY increase in the net interest expense balance. 

    Maintain Equalweight on FV of EGP12.73 

    We expect gross margin to gradually recover over the next quarter, as volumes are expected to revive during Ramadan, in addition to the gradual price increases (average of 7-8% across the board in FY19 implemented throughout the year). According to management, FY19 SG&A/revenues are expected to maintain an average of 18%, similar to FY18 levels. JUFO is trading at a P/E19 of 22.2x and EV/EBITDA19 of 10.3x vs the local and emerging market peer average of 20.4x and 12.14x, respectively. We maintain our FV of EGP12.73 and an Equalweight recommendation.