Equity Analysis /

Egypt food & beverage: On the ground update

  • Companies producing consumer staples and shelf-stable foods are going to benefit the most from the extended quarantine

  • Companies that cater to the tourism and hospitality segments are going to be hit the most by the flight suspension

  • Firms are moving towards securing 2-4 months of inventory to hedge against any future raw material or FX shortages

Al Ahly Pharos Securities Brokerage
2 April 2020

Sales to restaurants and hotels hammered, while supermarket retailers face intense demand 

  • Over the past two weeks, food processing companies saw a noticeable increase in supermarket sales as consumers stockpiled their pantries as a reaction to the coronavirus. Some food categories benefited more than others as consumers prepare to be quarantined for an extended period of time, most notably pantry staples and shelf-stable foods (e.g.: dairy products, grains and canned goods). 
  • However, this trend is not sustainable on the long-term, and is expected to slow down as supermarkets ration stock items and consumer storage-space is strained. Also, Ramadan season in 2Q20 historically lends to slower purchasing patterns across most FMCG segments.
  • On the other hand, the government’s decision to suspend air traffic and impose a curfew have crippled the country’s hospitality and tourism sectors, both of which are key consumers of FMCG products. Additionally, packaged snack food should also see lost sales as a result of the shutdown of schools and universities until further notice. 
  • Likewise, poultry prices have been rising steeply since January 2020, largely owing to the higher costs associated with heating during the winter season, thus pushing live-bird prices to EGP25/kilo from EGP18/kilo in December 2019. Prices of chicks have further increased over the past weeks, due to the rising demand from consumers ahead of the Ramadan, reaching EGP30/kg today. Yet, the overall effect on poultry processing companies may be neutral given that a big portion of the poultry market caters to restaurants and hotels. 
  • The overall effect of these factors, and for how long they will persist, is inconclusive considering they have been ongoing for less than a month. That being said, consumer staples stocks typically hold up better during times of economic downturns and market panic.

Producers are not facing raw material shortages yet, but are stockpiling inventory just in case 

  • On the supply-side, companies are moving towards securing 2-4 months of inventory on hand to hedge against any future raw material shortages and/or depreciation in EGP. All F&B stocks across our coverage universe have reported that their supply chain activities are operating normally as of now. 
  • The current commodity market is supportive of companies increasing their safety stocks at current prices, most notably with skimmed-milk powder prices declining in USD-terms by 16.5% YTD and palm oil prices declining by 17.4% YTD.
  • The increase in working capital, however, is going to reflect adversely in a higher debt balance to finance increased purchasing levels. The recent 300bps cut in interest rates could slightly soften the impending hike in interest expense, although it will lag slightly given the medium-term tenure of most facilities.