Earnings Report /
Egypt

Domty: Q2 20 – Margins weighed down by sales mix and higher debt balance

  • Annual topline growth was driven by an improvement in cheese and bakery volumes...

  • ...but lower bakery profitability dragged annual and sequential GPM

  • Meanwhile NPM saw a marginal drop despite recording a higher interest expense

Al Ahly Pharos Securities Brokerage
11 August 2020

Cheese segment leads annual and sequential top line growth

DOMT recorded 2Q20 revenue of EGP711 million (+9.9% YoY but -4.6% QoQ), reflecting strong annual recovery in the cheese segment and higher capacity in the bakery segment. Sales of cheese (74% of topline) reacted positively to the boost in retail sales during 1H20, which compensated for the drop in sales to the ministry of supply over the same period. The cheese segment’s +4.1% YoY and +1.5% QoQ growth in topline was also supported by the development of the mozzarella cheese SKU, which prompted the addition on a new production line in August 2020.

The bakery segment also witnessed a notable YoY increase in sales despite the closure of schools and universities and the lockdown measures introduced during the quarter, following the expansion of the production capacities. Additionally, DOMT’s juice portfolio saw a milder decrease in sales than competitors, with the market contracting by 20% YoY in 2Q20 versus only 3% YoY for Domty.

Margins weighed down by sales mix and higher debt burden

2Q20 GPM came in at 23.5%, -1.0pps YoY and -1.2pps QoQ, owing to lower profitability in the bakery segment as the company offered sales incentives and discounts. Margin decay was also capped by the company’s strategy to stock-up on raw materials & packaging materials at favorable prices at the beginning of the year.

EBITDA margin recorded 9.6% (-1.7pps YoY and +0.8pps QoQ), mirroring the +1pp YoY and-1.8pps QoQ change in the SG&A/revenue ratio on account of the marketing efforts embarked by the company during the quarter.

Net profit and NPM amounted to EGP32 million (-15.5% YoY and -1.2% QoQ) and 4.5% (-1.3pps YoY and +0.1pps QoQ), exceeding our estimates by 13% and 0.4pps respectively. This includes a higher debt balance (3.9x Net debt/EBITDA in 2Q20 versus 2.4x in 2Q19 and 2.3x in 1Q20) reflecting in an increase in the company’s overdraft facilities to finance the increase in inventory days on hand by 1 month to 3 months, to hedge against supply disruptions and price volatility. This made interest expense stable, despite enacted rate cuts over 2Q20.

Margin rebound to mirror bakery segment recovery

We believe that DOMT will be a beneficiary of the easing of the lockdown measures and better seasonality in 3Q20, that will be especially evident in the bakery and juice segments. On the cost-side, management disclosed that they are currently working on actively reducing their operating expenses to aid margin improvement over 2H20. The pick-up in sales should reflect favorably on DOMT’s cash conversion cycle, debt balance and interest expense as well.

DOMT is currently trading at FY20e P/E of 12.6X and EV/EBITDA of 4.1x. The stock did not re-rate as much as peers YTD and is trading at healthy margins compared to its historical norms. We reiterate our OW recommendation.