Flash Report /
Egypt

Obourland: 2Q19 analyst day highlights

    Farida Salama
    Al Ahly Pharos Securities Brokerage
    9 September 2019

    Cheese

    • Carton pack holds 80% of the cheese market (the remainder is loose cheese). Currently OLFI's white cheese market share stands at 40-42% 
    • Saturation of the cheese market led to opening new markets and exploring new products (juice and milk). The cheese market is saturated and supply is double the market demand, especially after some competitors were able to import packaging materials from China at lower prices. Accordingly, competing at lower prices, which negatively affected OLFI’s volumes and cheese market image. 
    • Management reacted through discussions with Tetrapak to help differentiate the company’s product. OLFI agreed with Tetrapak to change the packaging to a more modern shape and add the option of ‘easy opening’. Tetrapak has exclusivity for this type of packaging. OLFI signed a contract for 4 new production lines at an investment cost of USD11 million, which will replace 10-11 old production lines to help fight the Chinese packaged products. OLFI received other financial benefits such as USD 2 million growth support in the milk and juice segments (received in advance instead of over a 4-year period). Also, 5% discounts on packaging material for 5 years (5% for 250gm and 10% for 125gm packaging material). 
    • Total investment cost amounts to USD11 million, 20% was paid in FY19 and the remaining amount will be a capital lease on 5 years with 1 year grace period. Tetrapak will cover 50% of the marketing expenses for the new packaging (marketing campaign amounts to EGP12 million). New packaging should be launched by Oct19 and is not expected to negatively affect margins since OLFI has 5% discount on packaging paper. 
    • The company cancelled the mozzarella product and sold its production line and decided to focus on processed cheese. 
    • Total white cheese Tetrapak market volumes are 320,000 ton/year and the processed cheese 100,000 ton/year. 90% of the processed cheese market is ‘triangular’ cheese since it is easy to store and use. Hence, the company decided to introduce new processed cheese product that competes with the ‘triangular’ cheese at an attractive price (c.EGP6-7 for 100gm vs EGP11-13 for 110gm for premium triangular cheese). The new product will be easily stored, transported and used and will be in the form of a squeezable tube. The company signed a ‘market test’ agreement with Tetrapak.  The agreement gives OLFI the right to test the machine (which costs USD1 million) and the product for 1 year, at no cost. Following the test, the company either proceeds by purchasing the machines and negotiating the payment plans or Tetrapak will take back the testing machine with no further cost on the company. However, the company expects the new product to succeed and to order new machines throughout the year. The new machines are exclusive to Obour Land for the period of the market test. 
    • New processed cheese line is expected to start operating by April 2020. The new line has the potential to produce 4,000 ton/year at 90% utilization rate. In 3 years’ time, volumes are expected to increase to 10,000 ton/year contributing EGP600 million to revenues. 
    • Management expects processed cheese to contribute 10-15% of revenues in 3 years. 

      

    Milk & Juice 

    • Milk market share stands at 1.4% while juice is 0.8% with 1.5 years having past since launch. Utilisation rates for juice and milk (1 Liter packs) is 18%. The ‘milk and juice’ segment contributes c5% of total sales. 
    • The company’s strategy in creating demand and building  market share in milk and juice is increasing its outreach to small outlets across Egypt, followed by wholesalers and finally chains (10% of market volume). 
    • Management believes that there is a gap between the first and second player in the market for milk, which they are targeting. 
    • The current ratio for loose milk stands at 50%. Conversion rates are slow since loose milk is cheaper than packaged milk (unlike loose cheese) and loose milk is perceived to be healthier. Management believes that no major developments will take place in the transformation from loose to packaged milk unless regulations ban loose milk. 
    • Current Milk production volumes 500 ton/month and 6000 ton/year. The farm will produce 6,000-8,000 ton/year covering the company’s milk production needs. The farm is currently in process of obtaining licenses. 
    • OLFI is working on launching two flavored milk products by Feb20. 
    • Management expects milk and juice to contribute 20-25% to revenues in 3 years. 

    Updates

    • Volumes are expected to increase by 3-5% in FY19. 
    • White cheese prices increased by 4% in 1Q19 and 1% in July 2019. Management also stocked up on raw materials, hence GPM is expected to reach 21% in 3Q19 (vs 20% in 2Q19). If the USD/EGP reaches EGP16, the company expects GPM to reach 24% levels. 
    • The company offers loyalty incentives for small outlets through retail discounts. In FY18, it was recorded under SGA in the salaries of the agents and drivers. However, this year it is recorded as sales discount, which lowered sales and raised SG&As, hence GPM pressure. 
    • SG&As/Revenues is expected to stand at 6% in FY19.