Equity Analysis /

Egypt F&B Sector 2020: Value contingent on new ventures

    Farida Salama
    Diyar Hozaien
    Al Ahly Pharos Securities Brokerage
    21 October 2019

    We update the DCF valuation for our F&B coverage after incorporating new products, revising estimates and rolling over our forecast period by one year. We believe F&B companies’ performance was lower than expected during FY 19, dragged by tight competition, fiscal consolidation, lower purchasing power and high raw material cost. Accordingly, we cut our forecasts on all consumer stocks on weak 2019 volumes and profitability. 

    In light of this, we downgraded our FV for JUFO, DOMT and OLFI to EGP11.02/share, EGP10.00/share and EGP7.25/share, respectively with an Overweight recommendation due to recent share price slump. On a macro level, consumer purchasing power is expected to recover post the recent deceleration in inflation, EGP/USD appreciation, falling interest rates and the completion of the subsidy phase-out program. As a result, the F&B sector would be among the first sectors to benefit from a steady economic recovery beyond 2019. 

    Despite improving macro conditions and consumer spending behavior, we expect muted growth in JUFO, DOMT and OLFI’s core product offerings caused by existing market maturity in their respective segments. Hence, JUFO, DOMT and OLFI are creating new growth opportunities through 1) expanding their portfolios beyond their core offerings to improve overall margins, hence new investments took place in FY 19, 2) improving distribution channels to increase outreach and maintain volumes, and 3) increasing S&D through marketing/promotions to improve market share. 

    We believe the F&B sector’s main growth pillar is expanding the companies’ portfolios with ‘high-margin’ products that could shield overall margins and improve profitability.

    JUFO: Topline growth to mirror overall rebound in consumer demand

    Egypt’s dairy market is characterised by low per capita consumption and low conversion rates from loose to packaged milk (c.49% in 2018), leading to sufficient room to ramp-up sales volumes going forward. While milk is more resilient to consumption volatility, yogurt and juice are have more elastic demand that should recover with improved economic well being and higher purchasing power. 

    2019 was a particularly tough year as Juhayna’s muted sales volume growth reflected the overall pressure witnessed in F&B sector. However, Juhayna has positioned itself to benefit the most from the expected recovery in food expenditure driven by their 1) sustained leadership position and strong brand equity across all three segments, 2) adaptive product portfolio catering to both premium and mass consumption, and 3) flexible pricing policy to allow for the pass-through of expected exchange rate weakness or rising raw material costs. The factoring of steady topline growth and stable margins over the forecast period has resulted in the downgrade of JUFO’S FV to EGP11.02 per share, but an Overweight recommendation after the recent severe drop in share price

    DOMT and OLFI: Cheese Producers Branching Out

    Cheese producers have been recording double-digit revenue growth figures of an average c25% between FY 15-18, however, the segment has matured, witnessing a slowdown in volumes during FY 19 on account of 1) market maturity owed to packaged cheese reaching 80% of total cheese market, and 2) fierce competition; where new companies have been able to enter the market during FY 18 using cheap packaging imported from China. 

    That being said, we expect a slow volume growth of 3-5% going forward. Cheese producers have also been suffering from a margin squeeze caused by the recent increase in raw material cost, mainly Skimmed Milk Powder (SMP) (+21.5% YTD reaching USD2,674/ton). However, EGP/USD appreciation partially absorbed the increase in raw material cost, saving margins from a harsher squeeze. In light of the white cheese market conditions, companies decided to branch out and enter new segments that would gradually revive growth post weak FY 19 performance. Hence, we downgraded DOMT and OLFI FV to EGP10.00/share and EGP7.25/share, respectively on lower white cheese growth rates, while maintaining an Overweight recommendation for both companies, on share price slump. 

    We expect the white cheese market to remain stable going forward with lower contribution to revenues for both companies (DOMT to c55% by FY 24 down from c.70% in FY19 and OLFI c85% by FY 24 down from c.95% in FY19). We also believe that the juice segment for both companies has higher potential in exports due to the fierce competition with established brands in the local juice market. 

    Cheese producers resumed their capex spending during FY 19 where DOMT invested heavily in increasing the ‘sandwich’ capacity, while OLFI has been focusing on 1) inaugurating a dairy farm to support dairy needs, 2) revamping white cheese packaging, and 3) expanding the processed cheese offerings. Both companies’ investments should start reflecting on revenues by FY 20 in parallel with the expected relief to consumer purchasing power