Earnings Report /
Egypt

Domty: Q2 19: Volume-driven top line performance

    Farida Salama
    Al Ahly Pharos Securities Brokerage
    14 August 2019

    Volumes hit annual and sequential top line

    Q2 19 top line amounted to EGP647mn, down 1.2% qoq and 6.7% yoy. Annually, revenues declined across all segments. We believe annual top line drop was volume-driven since: 1) cheese sales declined by 16% yoy, dragged by 22% yoy drop in government sales, and 2) Q2 19 coincided with Ramadan (low season). Quarterly, revenues witnessed a 3.3% qoq drop in white cheese segment and 9.2% qoq bakery segment (-9% qoq lower volumes), however juice revenues rose by 21.3%. DOMT increased white cheese prices by c3% YTD and is planning an additional 2% during FY 19.

    Sequential profitability improvement; SG&As burden annual margins

    GPM came in at 24.5%, flat qoq and -0.6ppts yoy. GPM was negatively affected by lower top line performance. EBITDA margin recorded 12.4%, up 1.5 ppts qoq and down 3ppts yoy. EBITDA margin improved quarterly on the back of lower SG&A/Revenues (-1ppts), supported by a 48% qoq drop in marketing expenses after it reached its peak in Q1 19. Annually, EBITDA margin considerably dropped by 3ppts yoy on account of higher SG&A/Revenues (+3.5ppts). Annual EBITDA margin dragged NPM (-2.5ppts yoy) despite lower interest expense (-30% yoy) and tax expense (-29% yoy).

    Domty signs third bakery line; maintain Overweight

    DOMT signed a contract for a third bakery line at an investment cost of EGP50mn, financed through medium-term loan in US$ and self-financing paid in EGP. The line will add a capacity of 270,00pcs/day to reach a total capacity of 930,000pcs/day by Feb'20. Also, we noted earlier that the second line (capacity of 400,000pcs/day to reach 660,000pcs/day) should arrive by Sep'19 and is expected to reflect in Q4 19 figures. The white cheese market in Egypt is very competitive and growth rates are growing at a slower rate (on its way to saturation), hence DOMT’s ongoing expansions plans are unlocking new higher margin segments that could potentially pull up the overall margins. The company is also launching a new juice product under the brand name of 'Slim' and is planning to distribute it locally and internationally.

    We believe margins could improve in Q3 19 due to seasonality, higher prices and better performance for the bakery segment as volumes recovered post Ramadan. DOMT is trading at 2019 P/E of 14.5x and EV/EBITDA of 8.0x vs local and emerging market peers of 22.4x and 11.9x, respectively. We maintain our TP of EGP13.07 with an Overweight recommendation.