Equity Analysis /
Egypt

Domty: 1Q19 – Positive topline performance; maintain Overweight

    Farida Salama

    Annual and sequential topline growth

    1Q19 revenues amounted to EGP654.8 million, up 6.7% QoQ and 10.6% YoY. Annual topline improvement was driven by the addition of EGP60 million of the new Domty ‘sandwich’ and an 8.4% increase in juice revenues. Annual topline growth was price and volume- driven. Quarterly, revenues rose across the board with a 42.1% growth in Domty ‘sandwich’ revenues, 4.3% in cheese and 2.8% in juice. Cheese prices increased by 2% in Mar19. 

    Marketing expense bite margins

    GPM recorded 24.6%, flat QoQ and up 0.7pps YoY. GPM remained relatively stable since the increase in global Skim Powder Milk (SMP) prices (c.+28% YoY) was absorbed by lower palm oil prices, appreciation of EGP and the ‘high margin’ Domty sandwich (39.5%). Annually, EBITDA margin noticeably dropped due to a 4pps YoY increase in SG&As/revenues caused by higher marketing expense (+161% YoY). NPM recorded 4.4%, up 1pps QoQ and down 2pps YoY. NPM improved quarterly on lower interest expense (-32% QoQ) and healthcare tax (-54% QoQ). Also,  annual drop in EBITDA margin (-4pps) was partially offset, on the NPM level, by a lower interest expense (-29% YoY) and income tax (-24% YoY), hence NPM witnessed a 2pps drop YoY. Margins are stable on a quarterly basis, however dipped annually on higher SGAs expense. Excluding the high marketing expense (+161% YoY) spent during 1Q19, EBITDA margin would have ended flat and NPM would have showed positive growth.

    Domty sandwich unlocks potential; maintain Overweight

    DOMT started operating its new Domty ‘sandwich’ line extension in Mar19, increasing its production capacity by 30% to produce a total of 260,000 pc/day. Also, the company expects the new ‘sandwich’ line to arrive by Sep19, increasing capacity to c.660,000 pc/month and start operating in 4Q19. DOMT planned 6% price increases in white cheese for FY19, 2% was implemented in Mar19, 2% in April19 and the remaining 2% will be implemented throughout the year. The bakery segment is of high margin, which is expected to help the company achieve its target GPM of 28% and NPM of 5%. According to management, profitability rates for 2Q19 are expected to be within 1Q19 levels. 

    We believe the new bakery segment unlocks a new potential for the company and will act as a growth pillar for FY19, hence we believe margins will improve going forward. DOMT is trading at 2019 P/E of 18.7x  and EV/EBITDA of  9.8x  vs local and emerging market peers of 19.1x vs 9.8x, respectively.  We maintain our TP of EGP13.07 with an Overweight recommendation.