Earnings Report /
Egypt

Juhayna: Weak Demand Pressures Margins, Downgrade FV to EGP10.75

    Al Ahly Pharos Securities Brokerage
    11 February 2020

    Seasonality and Price Hikes Hit Volumes 

    JUFO recorded a topline of EGP1,844 million in 4Q19, +7.8% YoY and -9.7% QoQ. Sequentially, topline contraction came on the back of volume decrease across the board due to a seasonally weaker quarter. On a full year basis, JUFO’s revenues amounted to EGP7,636 million (+7.2% YoY); in line with our expectations. YoY Revenue growth was evident across JUFO’s three core segments, following the blended 3.5% price hike enacted in 1Q19, however falling short of JUFO 5-year average YoY growth rate of c.17%..

    Gross Margin Gains Offset by Increase in SG&A Spending 

    FY19 GPM came in at 30.2% (+0.4pps YoY) as revenue growth outpaced COGS growth (+6.6% YoY) owing to the price hikes mentioned earlier and cost savings as a result of the strengthening of the EGP. Margin expansion on the gross profit level comes despite the higher global skimmed milk powder (SMP) prices (+37.5% YoY since December 2018 at c.USD3,026/ton), as JUFO managed to secure cheaper SMP stock at the beginning of 2019. 

    EBITDA margin amounted to 14.4% in FY19 (-1.6pps YoY), as the SG&A Expense/Revenues increased to 18.8% in FY19 versus 17.5% in FY18 as a result of a +20.1% YoY hike in advertising and promotions expense in an effort to stimulate demand in a weak market. FY19 NPM recorded 4.3% (-1.4pps YoY) reflecting the contraction in EBITDA margin, as well as the +75.2% YoY increase in income tax given the expiry of the tax-exemption period for some of JUFO’s subsidiaries and the +13.9% YoY increase in other operating expenses due to the full-year application of the healthcare tax. 

    It is notable that JUFO managed to decrease its working capital and net debt levels during 4Q19, resulting in the decrease in interest expense (-7.4% YoY). FY19 net debt to equity declined to 0.51x in 4Q19 from 0.65x in 4Q18, while working capital days decreased to 44 days in 4Q19 from 66 days in 4Q18. Overall, the decline in JUFO’s leverage offered some relief to bottom-line in spite of other challenges faced by the company in 2019.

    Downgrade FV to EGP10.75, Maintain Overweight

    We update our target price for JUFO to EGP 10.75/share (down from 11.02/share) but maintain our overweight recommendation. 4Q19 results prompted trimming our topline forecast growth to a 5-year average of 10%, from our previous assumption of 11%, to account for weaker volumes across all segments and limited price hikes. We also factored in normalization of SG&A expense, an improved cash conversion cycle and lower net debt which slightly offset the decline in revenues. 

    JUFO proposed a cash dividend of 0.20/share, which translates to a dividend payout ratio a dividend yield of 2.2% and a payout ratio of 57.3% versus a respective 1.7% and 46% proposed in FY18. JUFO is currently trading at a 2020 P/E of 16.9x and EV/EBITDA of 7.5x vs local and emerging market peer average of 17.9x and 9.7x, respectively.