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Egypt food stocks | Weathering the storm selectively; Pick Obour Land

Not out of the woods, with a challenging year ahead. We hold our views unchanged, cutting our Egypt food TPs by c10%, on average, factoring: i) an average 35bps cut in 2021e GPM, reflecting a higher-than-expected spur in commodity prices, and ii) slower-than-anticipated recovery in cheese volumes, amid the higher magnitude of price hikes. Beyond 2021e, improved affordability should allow for better cost passing ability (+3-5% price hikes over 2022-25e), offsetting any weakness in EGP, as the prolonged, yet inevitable consumption recovery unfolds, with fading inflation (+1pp y-o-y in real wage in 2021e). Obour Land remains our pick, with a robust strategy enabling it to weather headwinds, unlike Domty, which trades at similar levels (2021e P/E of 9.5x). While the market ignores the higher EPS growth for Juhayna and Edita, rising concerns over management for the former and imposition of VAT for the latter remain overhangs (2021e P/E of 9.8x and 15.7x, respectively).

Steadily crawling back towards recovery. Cheese players’ 2021e volumes should be challenged by the price hikes, to partially pass on the higher commodity exposure. This should interrupt Domty’s focus to recover volumes, via regaining market share, especially as it phases out key agents in 1Q21e. While Obour Land’s fenced territory against competition (75% of sales), with cautious price hikes, ensures resilience, it sustains c4% p.a. volume growth, with mild room for surprise, on market saturation. Meanwhile, the solid snacks market (+6% y-o-y in 2020) bodes well for Edita and Domty’s gradual volume recovery amid traffic normalisation, picking up in 2021-22e (+c13% y-o-y, on average), fuelled by new launches. Despite the stalling packaged milk conversion story (51% is loose), Juhayna’s volumes should remain healthy (6% y-o-y), despite scaling discounts, with juice rebranding supporting recovery from 2020 low.

Soaring commodities challenge 2021e. The upward trend for milk powder and oil prices persisted y-t-d (+16% and +24%, respectively), post the global rebound. We see this, along with the sustainably high marketing and S&D spend, to guard market shares and back new ventures, overshadowing the cost-cutting efforts and stable EGP, looking for an average c90bps contraction in 2021e EBITDA margin. Cheese players are the most exposed (milk powder c35% of CoGS, c20% for oil), yet we remain fond of Obour Land thanks to its long-sighted stockpiling strategy at attractive prices (c6 months of SMP ahead vs. c2 for Domty), limiting the need for aggressive hikes similar to Domty (+2% in 1Q21 vs. +6%), that is further challenged by pushing low-margin fighter brands. Low reliance on SMP (20-25%) is a breather for Juhayna, with a lower impact from the 10% rise in fresh milk prices y-t-d, on higher feed costs, while Edita’s diversified commodity base partially shields it.

1Q21e earnings on the verge of a squeeze. Although we foresee robust recovery in 1Q21e revenue (except Domty, on phasing out agents), pressures on profitability should intensify. Edita and Obour Land should stand out, with broadly flat earnings (+c2% and -c4% y-o-y, respectively), thanks to stellar sales pickup (+c13%). The pickup in Juhayna’s sales trends and finance cost savings is insufficient to offset the rising cost pressures (scaled discounts starting Apr-21) and inflated marketing spend (-c16% y-o-y). Domty should underperform, as the plunge in volumes and higher exposure to market volatility should take its toll on earnings (-c46% y-o-y).