Pitch: Star Player in the Egyptian F&B Landscape
We re-initiate coverage on Edita Food Industries (EFID), a key name in the Egyptian FMCG landscape, with an Overweight recommendation and a FV of EGP19.02, implying an upside potential of 41%. Over the past two decades, Edita managed to cement its dominant position in the fast-growing packaged snack food industry in Egypt with leading market shares in the i) cake (46%), ii) croissant (63%), iii) rusks (44%), iv) wafer (10%) and candy (8%) segments1. Additionally, the company has the exclusive ownership of the international HoHos, Twinkies and Tiger Tail (HTT brands) in 16 markets across the Middle East and North Africa. Today, Edita operates five state-of-the-art facilities, encompassing 30 production lines and 144 SKUs. 2018 also marked the beginning of operations of Edita’s joint venture (JV) with Morocco’s Dislog Group, paving the ground for Edita’s first overseas manufacturing facility. On the operational front, Edita is characterized by its strong balance sheet and cash flow generation owing to its 97% cash-sales policy and negative cash conversion cycle (CCC). The company is one of the few F&B players to invest in capacity expansions over 2018-19, thus positioning it to benefit the most from the ongoing recovery in consumer demand amidst the recent favorable macro conditions. Accordingly, we expect Edita to deliver a revenue CAGR of 16.5% over 2019-24f and to return to pre-devaluation GPM levels of 39% by 2024f, as the company’s price point migration and portfolio optimization strategy continue to bear fruit.
2020 Story: Back to Investment Mode
Prudent strategies shaped Edita’s 2018, as the company delayed capex outlays in favor of deploying strategies that supported portfolio recalibration to fend off volume and market share regression. Accordingly, Edita was successful in delivering margin and volume recovery that is swiftly approaching pre-devaluation levels. However, the latest monetary easing measures saw Edita kick-off investments in the rapidly-growing wafer and candy segments. Management budgets c.EGP300 million for 2019e capex, with c.EGP138 million already underway by 9M19. We expect the company to ramp up capacity by c.20% by 2024f to cater for the volume growth in Edita’s home market and abroad. Edita is also gaining pace on the regional front, as the construction of its Morocco facility is set to begin during 4Q19 and for production to start by the second half of 2020. Supported by USD20 million of financing from the IFC and a MAD15 million grant from the Moroccan government, the company aims to replicate their business model in the Moroccan market by positioning the facility as a stepping stone into West and North African Markets. Although we see the Morocco segment adding to c.4% of 2024f topline, we expect the venture to add value to the company beyond our 5-year DCF period.
Attractively Priced; Awaiting Long-term Catalysts
Edita’s stock has long been trading at a warranted premium to other F&B stocks on the EGX given its superior return and growth profile. Notably achieving an ROAE and ROAA of 29% and 15% respectively during FY19e, and topline CAGR of c.18% over 2015-19. However, following Edita’s share price correction (currently -c.48% lower than the 52- week high of EGP20.0) and stellar 3Q19 earnings, the stock is trading at more attractive multiples. EFID is trading below peers at a 2020 P/E of 17.7x and EV/EBTIDA of 9.2x versus EM F&B peers of 21.5x and 11.2x. We also believe the share price can justifiably trade at a premium to local F&B players to account for Edita’s aforementioned capacity expansions and healthy financial position. Management also budgets the dividend payout ratio to be approximately 35% to 50% of IFRS net income, subject to legal restrictions and if warranted by operational results, reflecting an average 2020 dividend yield of c.2%.