Higher Sandwich Contribution Compensates White Cheese Volumes Drop
DOMT recorded 3Q19 revenues of EGP720 million, up 11.4% QoQ and 4.2% YoY in line with our expectations (c.EGP730 million). Quarterly, revenue grew across all segments with cheese recording 7.6% QoQ growth, juice 12.6% QoQ growth and ‘sandwich’ 43.8% QoQ growth. Quarterly growth was price-driven as the company implemented 2% price increases during 3Q19 in plastic tubs, mozzarella and spreadable cheese as well as increased juice prices (c.5.5% YTD). Annually, cheese revenues dropped by 6.8% on lower volumes caused by lower government sales, declining by EGP90 million since the beginning of FY19, however higher sandwich contribution ( EGP79 million in 3Q19 vs EGP8 million in 3Q18) compensated for the drop in white cheese.
GPM Expands on Improved Pricing, Sales Mix and Lower Cost Pressure
GPM came in at 26.5%, up 2.0pps QoQ and 3.1pps YoY. GPM growth came on account of 1) higher contribution of the higher-margin ‘sandwich’ product, 2) EGP/USD appreciation, 3) higher juice margins recording 21% (up 5.7pps) post juice price increases, and 4) SMP inventory stock at lower prices. GPM reflected on EBITDA margin to record 13.9%, up 2.6pps QoQ and 1.5pps YoY. However, annual EBITDA margin was partially trimmed by 1.7pps YoY increase in SG&As/revenues owing to higher shipping cost (+45.6% YoY), wages (+17.5% YoY) and marketing expenses (+8.5% YoY).
NPM recorded 7.0%, up 1.2pps QoQ and 2.0pps YoY. Despite a 54% YoY increase in tax expense, annual NPM grew on lower interest expense (-37% YoY) supported by lower receivable days (working capital needs) along with lower local interest rates.
New Sandwich Line to Kick in; Maintain OW
DOMT installed the new ‘sandwich’ line which should increase capacity to 660,000pcs/day up from 260,000pcs/day and will start reflecting on 4Q19 revenues. We believe margins could further improve during 4Q19 on higher sandwich contribution and 2% price increase (implemented in Oct19) for white cheese Tetrapak products. However, we believe the drop in government sales will continue affecting cheese volumes YoY during the upcoming quarter.
DOMT is trading at 2020P/E of 12.3x and EV/EBITDA of 4.5x. We maintain our TP of EGP10.0 with an Overweight recommendation.