EUR 86.51 For Business Accounts Only

Egypt food stocks | At the tip of turning a corner, play on discretionary

Poised for an inflection point on spending momentum. Inflation is exhibiting a downward trend, filtering into a narrower inflation-wage gap of -4.7% in 2019e (vs. -10.7% in 2017) that is set to be bridged by 2H20, followed by a positive real wage growth of c2% in 2021e. We expect the pace of volume recovery across consumer names to gradually pick up in 2020e, swaying more towards discretionary items, and accelerate in 2021e on a steady consumption trajectory. This is backed by the continuation of monetary easing (2-3pp cut in interest rates in 2020e vs. 4.5pp in 2019) and a stronger EGP/USD. As we find recovery inevitable, Egypt food plays trade at attractive valuations, at a 36% discount to the historical TTM P/E.

Favour Juhayna on diversity, Domty on product innovation. Unlike the saturated cheese market, we see ample room for growth for dairy (51% is loose milk) in the medium-term, setting Juhayna apart, along with its diversified offering. Domty’s aggressive expansion in the high-margin bakery segment poises it to become a multi-product player, offering cheaper exposure to the fast growing snacks market (33% discount to Edita’s 22.1x). With an average net-debt/equity of 0.7x, both names are key beneficiaries of monetary easing. Juhayna trades at a 14% discount to peers, while Domty is at premium to Obour Land (2020e P/E of 14.7x vs. 7.9x). Juhayna’s rebranding (2H19), Obour Land’s package revamp, and Edita’s new launches should help maintain their leading positions in core markets, as product differentiation is key to fend off rising competition.

Contained costs on fading macro headwinds. Despite the 28% hike in powder milk price in 2019 (35-45% of cheese players’ CoGS, c17% of Juhayna’s), it remains 48% below the 2013 peak. We expect this, along with the higher marketing spend, to be balanced out by lower packaging costs (c25% of CoGS) in the short-term, on relatively contained oil prices and a stronger EGP. Beyond 2019-20e, the upturn in wages and tamed inflation should allow for better cost passing ability (+4-5% on average over 2020-24e), offsetting a possible weaker EGP and rising commodity prices, without hurting demand. We look for an average 30bps 2020-21 EBITDA expansion, and find Edita the most diversified in terms of commodity exposure.

4Q19e key catalyst. We see current levels attractive for Juhayna and Domty, as we look for stellar annual earnings growth rates in 4Q19 (Juhayna +c86%, Domty +c59%), both reaping the fruit of monetary easing, with the latter standing out vs. Obour Land (+26%), as the second bakery line reflects on numbers. Edita currently trades at attractive levels, c5% below its 2-year historical average, yet we expect higher marketing spending on rising competition to yield flat results (+c3%), before picking up in 2020e on product/segment launches. As the cheese market remains challenged, concerns over Obour’s milk and juice ventures’ pace of growth should deter short-term rerating.