EUR 43.03 For Business Accounts Only

Egypt food stocks | Recovery here to stay

Sector trading on appealing valuation; favour Juhayna and Domty. The sell-off across the board left valuations undemanding for most consumer names. We see continued volume recovery in 2019e on the introduction of new SKUs, recovering disposable income from a low base, falling unemployment (10.0% in 3Q18 vs. 11.9% in 2Q17), and population growth. We favour Juhayna, as it offers the most diversified exposure to Egypt’s consumer space, and Domty on an expected robust growth, driven by the packaged cheese market growth and successful launch of its bakery products in 3Q18. We remain fond of Obour Land’s cash-and-carry model, but we see rerating contingent upon delivering on its new ventures; not a 2019 event, in our view. Edita’s valuation remains stretched (2019e P/E of 25x vs. peers’ 16x) on prolonged recovery. 

Long-anticipated monetary easing a plus for leveraged players. Juhayna offers the highest growth profile among peers (2018-20e EPS CAGR of 45% vs. 30% for peers). The stock trades on a 2019e P/E of 16.8x (falling to 11.5x in 2020e), at a 25% discount to peers. We look for a 300bps cut in interest rates in 2019, expecting the CBE will resume monetary easing in 1Q19 (vs. 2H18 previously). 18%, 14%, and 42% of earnings growth in 2019e for Domty, Edita, and Juhayna, respectively, will be driven by lower cost of debt. Domty is the most leveraged within our coverage, with a 9M18a net-debt/EBITDA of 2.2x, followed by Edita and Juhayna, both with a net-debt/EBITDA of 0.8x.

Agility is key to grow; Domty to outperform. Domty’s launch of its bakery line, Edita’s introduction of lower price point SKUs, Obour Land’s venture into the milk and juice segments, and Juhayna’s introduction of Puck cheese with Arla were all key in supporting growth in 2018. Domty’s cheese sandwich was the blockbuster (100% utilisation in 6 weeks; cEGP18mn of sales per month). Domty plans to raise its bakery capacity 35% in 1Q19. We look for bakery sales of EGP200mn in 2019 (6% of top line; c23% of growth). Bakery carries a lucrative GPM of 30% vs. 23-25% for cheese and juice. With a 2019e P/E of 13x, Domty trades in line with Obour Land, but offers a higher growth profile.

Margins to expand; unforeseen currency crunch could disappoint. We look for an average net margin expansion of 130-360bps over 2018-20e. With 55-80% of CoGS directly or indirectly FCY-linked, a weaker EGP would trigger adverse price hikes, deterring demand and pressuring margins, in our view. We are unconcerned by the next energy subsidy removal in FY19e, as the utility bill cost contribution to FMCGs is negligible (c2-4% of CoGS). We expect companies to limit direct price increases in 2019, stimulating demand.