Equity Analysis /
Egypt

Domty: Analyst Day highlights: Negative impact to Q2 results from lower sales to government

    Farida Salama
    Al Ahly Pharos Securities Brokerage
    20 August 2019

    Domty's Q2 19 results were negatively impacted by lower sales to the government (-22% yoy, currently standing at 18% of revenues) as a result of the exclusion of eight million citizens from ration cards, and partially due to the high base effect from the exceptional results in Q2 18 (higher prices and high volumes with suppliers stockpiling inventory). H1 19 revenues are in line with the company’s expectations to meet their revenue target of EGP2.9bn in FY 19. 

    Segments update:

    • Cheese (revenues: -3.3% qoq, -16% yoy): Since the government’s exclusion of eightmillion citizens from ration cards, Domty implemented a recovery plan in July, pushing distribution to wholesalers and creating a loyalty programme to compensate for lower volumes. 80% of the drop in government volumes is expected to recover through wholesalers and the rest through other channels. Hence, wholesaler revenues is expected to increase by 50%-60% to reach mid-to-late 20% of revenues. Government-offered products are replaced by the higher margin ‘Domty Plus’. Compensating volumes using ‘Domty Plus’ products will increase overall margins as well as market share since government sales weren’t reflected in Nielson’s market sales figures. The company implemented a 3% price increase in fresh white, mozzarella and creamy cheese, but postponed price increases in tetrapak to help volumes recover. Tetrapak prices increased by 2% in Q1 19. 
    • Juice (revenues: +21.3% qoq, -5.3% yoy) recorded steady performance amid a contracting juice market (-10%), which implies that Domty is gaining market share (numeric distribution in greater Cairo and Alexandria is improving). Management repackaged juice products as well as announced the launch of a new product line ‘Slim’ (no sugar added) in Q3 19, to be distributed locally and internationally. Juice prices increased in Q2 19 by 3%.  
    • Bakery (Revenues: -9.2% qoq): Ramadan capacity utilisation dropped to 91%, but recovered post-Eid. The second production line is expected to start operating by October, hence will reflect on Q4 19 results. Third line should arrive by February 2020 and will increase capacity to c1m pcs/day. In case of excess capacity, plain bread will be produced instead. The company will expand its distribution to other governorates (initially distribution to Greater Cairo and Alexandria only). Three new flavours are expected to be launched in H2 19 (one in November and the other two by the end of Q4 19). The company will not offer cheaper products to rural areas, but will test the market first with the current product. The bakery segment compensated a drop of EGP99mn from the cheese segment through its EGP115mn revenue in H1 19. During Ramadan, the contribution from chocolate flavoured products (lower-margin) was higher than cheese to compensate for lower volumes during the month. Overall sandwich margin should pick up in Q3 19.   

    Distribution update: 

    • Domty initiated a distribution system revamp back in Q4 18, which started by phasing out some agents. Management finalised phasing out agents in April this year, and its contribution currently stands at c18%. Phasing out agent distribution aims at offering products sooner on the shelves, especially in distributing fresh products like sandwiches, so as to reduce expiry date risks across other governorates when the new line arrives. 
    • Domty started digitalising its distribution network by installing GPS in all trucks in order to track distribution (by customers and SKU). Management plans to implement the new system on a wider coverage like the Delta, Alexandria and Upper Egypt, which should be finalised by Q1 20. 

    Export business challenged by EGP appreciation vs US$

    The company is targeting to increase volumes in more profitable markets. Domty continues its private label agreement with Russia, which records profitable margins. Also, the company will start exporting white cheese to Ethiopia in Q3 19. 

    Guidance

    • Revenues of EGP2.9bn in 2019
    • Marketing expenses are expected to be slightly higher in Q3 19 vs Q2 19 and normalise in Q4 19
    • NPM to increase by 1ppt every quarter in H2 19 from higher prices, increased efficiencies and the reduction in marketing expenses
    • The company believes that in 2022, the cheese will constitute 50% of total sales (currently c80%) and the rest will stem from other segments