EUR 22.27 For Business Accounts Only

DOMT EY | En route to recovery; Remain Overweight

2021e a relief. We cut our TP by 26% to EGP9.00/share, as we trim 2020-24e EBITDA forecasts by c19%, to factor: i) an average cut of c10% in revenue, on subdued cheese volumes, pressured by the continued drop in government’s sales (<10% vs. 18-22% previously), post 2Q20 stockpiling, and the challenged distribution strategy, and ii) 1.3pp lower EBITDA margins. We look for a solid rebound in 2020-22e EPS of c23% p.a., on: i) regaining cheese market share, ii) better EBITDA margins (11.4% by 2022e vs. 10.6% in 2020e), on GPM recovery of the high-margin bakery, despite the step-up in S&D costs. Domty trades on a 2021e P/E of c10x vs. global peers’ c19x. Upside risk from finalising FrieslandCampina’s deal (signed MoU in Sep-20 to expand cheese exports to African countries), and downside risk from prolonged normalcy in economic activity, weighing on bakery and juice demand.

Cheese set to recover, yet unforeseen setback a risk. Despite the less appealing outlook for the cheese market, management has a concerted focus to recover volumes. In turn, we look for c7% y-o-y higher 2021e volumes (vs. +c3% y-o-y in 2020e), accelerating recovery from 2019 low, and surpassing pre-float levels by 2023e. This should be supported by regaining the lost market share via new SKU launches, aggressive marketing, and pushing low-margin fighter brands in rural areas. Despite the latter and foreseen hike in raw material prices, adjusting Plus range pricing in 4Q20 (+4%, 50% of carton pack), with another round in 1Q21e, should support 2021e cheese c50bps y-o-y GPM expansion to 24.0%.

Product diversification a plus. Domty is set to launch plain and flavoured milk by mid-1Q21, poising it to become a multi-product player, capitalising on juice’s ample processing capacity, with limited capex outlay (USD500k filling line, to be paid over five years). While we see room for growth in dairy (51% is loose milk) in the medium-term, we expect Domty to capture c1% market share by 2025e (11% of volumes), pending more visibility. This should help ramp up the segment’s volumes, along with garnering more juice market share and Rani’s high-margin co-packing agreement, lifting the segment’s 2021-25e GPM to c20% (vs. 18% in 2019 and 19.8% in 2020e).

Favourable sales mix, on firm demand in bakery. Despite the shift to e-learning until Feb-21, we see sustained demand for Domty sandwich, amid traffic normalisation, and room to grow plain bread's production (added end-1Q20, targeting 200-250k vs. 120k pieces/day in 4Q20), post launching the third line in 4Q20 (270k pieces/day). We look for 87% utilisation for the segment by 2022e (21% of sales vs. 18% in 3Q20), with a sustained GPM of c33% (vs. c38% in 3Q20), on higher competition and bread sales.