Earnings Report /
Egypt

Domty: 1Q22 – Cheese & bakery drive margins; Interest expense looms over profitability

  • Volumes soared annually on a weak base effect; driven by the cheese and bakery segment

  • Bakery segment achieves the highest margin; Increasing interest expense pressures bottom-line

  • Positive outlook backed by cheese and bakery segments; Heightened debt looms over profitability

Marina William

Volumes soared annually on a weak base effect; driven by the cheese and bakery segment

DOMT continues its track of top-line growth, recording EGP1,122 mn for the quarter, compared to EGP647 mn in 1Q21 and EGP1,087 mn in 4Q21, a hike of 73.4% YoY and 3.2% QoQ. 

The white cheese segment continues to be the major contributor, with 72% of total sales compared to 71% in 1Q21 and 64% in 4Q21, amounting to EGP804 mn (+74.5% YoY, +10.8% QoQ). White cheese volumes were able to record a 42% incline YoY, driven by a relatively weak base. 

The bakery segment is still holding ground of high growth, recording revenues of EGP244 mn, compared to a minimal EGP130 mn in 1Q21 and EGP258 mn in 4Q21 (+86.8% YoY, -5.7% QoQ). Sales volume for the bakery segment climbed by nearly 50% YoY.

The juice segment witnessed a weak quarter, which is expected due to the non-essentiality of the product and increasing prices affecting volumes. The juice segment recorded revenues of EGP76 mn, rising by 35.5% YoY, yet dropping by 26.7% QoQ, attributing to total revenues only 7%, compared to 9% in 1Q21 and 10% in 4Q21. 

Bakery segment achieves the highest margin; Increasing interest expense pressures bottom-line

Gross profit for the quarter achieved a strong EGP270 mn, compared to EGP133 mn in 1Q21 and EGP257 mn in 4Q21 (+103.1% YoY, +4.8% QoQ), leading to a GPM of 24%, versus 20.5% in 1Q21 and 23.7% in 4Q21 (+3.5pps YoY, +0.4pps QoQ). 

Despite the rally in raw materials driving COGS by 65.7% YoY and 2.7% QoQ, the company was able to achieve strong margins driven by passing on these price increases to the end consumer. 

The cheese and bakery segments accepted such a rise in prices without severe impact on volumes so far, the cheese being a low-cost protein source, while the bakery being a go-to snack, especially after the resumption of offline activities after the pandemic. 

The bakery segment recorded the highest margin of 31% during 1Q22 (+2.4pps YoY, +0.9pps QoQ), followed by the cheese segment recording 23.4% (+3.8pps YoY, +0.7pps QoQ), and last was the juice segment with a weak margin of 8.1% (-7.5pps YoY, -6.1pps QoQ) driven by high competition and weak demand in an inflationary environment.

SG&A expenses recorded EGP180.8 mn, a strong climb of 35.8%, and a decline of 2.6% QoQ. Despite the sharp annual incline, their percentage of sales dropped by 4.5pps YoY to reach 16.1% during 1Q22, compared to 20.6% in 1Q21 and 17.1% in 4Q21. 

Healthy top-line and gross profit trickled down to a solid EBITDA of EGP113 mn, compared to a minimal EGP18 mn in 1Q21 and EGP95 mn in 4Q21, leading to an EBITDA margin of 10%, versus 2.7% in 1Q21 and 8.8% in 4Q21.

Despite the positive performance in the income statement, the bottom line witnessed a sequential bump by recording EGP51 mn, compared to EGP53 mn in 4Q21 and net losses of EGP3 mn in 1Q21, leading to a NPM of 4.5% for the quarter, versus 4.8% in 4Q21 and -0.5% in 1Q21. This bump could be mainly attributed to the climbing net interest expenses, reaching EGP27.6 mn, compared to EGP11.3 mn in 1Q21 and 14.6% in 4Q21 (+143.9% YoY, +88.8% QoQ). This was driven partially by the heightened debt level to reach EGP1,218 mn, (+13.3% YoY, +2.6% QoQ). The rise in debt levels was backed by the addition of two long-term loans amounting to EGP24.4 mn to finance expansions of the bakery segment and enhance the capacities of already existing lines of all segments.

Positive outlook backed by cheese and bakery segments; Heightened debt looms over profitability

DOMT achieved solid performance during 1Q22, only hindered by interest expenses. The weak base effect of 1Q21 gave the annual comparison a strong boost, yet despite a strong 4Q21, the sequential performance came in the green as well. The solid performance came backed by the two main segments of white cheese and bakery, supported by demand elasticity for cheese and increasing prices for both. The juice segment was not as fortunate due to weak market share and positioning, as well as loss of demand by rising prices. As white cheese continues to be the major contributor to sales, the bakery segment is expected to continue providing the highest gross margins due to higher price points and easier pricing.

The rise in debt, driven by expansion plans and higher working capital financing held back the growth witnessed across all other accounts to reach the bottom line. Such rise forms a concern when it comes to profitability as interest rates continue to rise and commodities prices continue their rally.

DOMT is currently trading at a FY22 P/E of 10.3x and an EV/EBITDA of 6.6x.