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EFID EY | Imminent recovery warrants rerating; Remain OW

Steep growth trajectory ahead, recovering from 2020e low. We cut our 12M TP by c27% to EGP13.5/share, as we trim 2020-24e EBITDA forecasts by c35%, to factor an average cut of c20% in revenue forecasts, on slower-than-expected consumption recovery, exacerbated by COVID-19 implications, as well as 3.7pp lower EBITDA margins. However, we believe: i) Edita’s strategy to migrate consumers to higher-price points SKUs via new launches and indirect price hikes, along with iii) the gradual expected recovery of the snacks market, amid the fallout, bodes well for operations’ recovery. In turn, we look for a 2020-22e EPS CAGR of 27%, driven by higher volumes and margins, on a better sales mix. The market does not price in this recovery, in our view, with the stock trading on a 2021e P/E of 19.6x, 37% growth adjusted discount to snacks’ peers, and 45% below its historical levels.

Subdued volumes behind, 2021e a breather. We look for gradual volume recovery across the board of 12.2% y-o-y (vs. -c8% in 2020e packs) in 2021e, amid traffic normalisation, sustaining the pick-up in 2022e (+c12% y-o-y). Growth is also fuelled by new launches, which should help: i) sustain bakery’s strong performance, with intact market growth (+13% y-o-y, as of 9M20), ii) revive wafer demand, post two line additions by end-2020/early 1Q21, as well as iii) recover cakes market share (c51% in Aug-20 vs. 45% in Jan-20). Meanwhile, we look for a ramp-up in the biscuits segment (soft launched in May-20), as Edita markets the new launch and rolls out more SKUs, making up c3% of 2024e top line. The Morocco venture should kick off in 1Q21e, contributing c2% of 2024e top line, with room for upside post adding new lines.

On track to recover margins, albeit at new lower levels. An improved sales mix, thanks to new product launches, indirect price increases, and volume recovery, should drive the 50bps y-o-y EBITDA margin expansion to 15.2% in 2021e. However, higher marketing expenses, to back new ventures, and the step up in distribution costs should keep EBITDA margins below historical levels over 2021-22e, reaching the 2019 level of 16.6% by 2023e, on reaping rewards of the distribution expansion.

Unforeseen impact from VAT is key risk. As we downplay any direct price hikes in the short-term, we believe the potential imposition of 14% VAT on snacks and baked products (pending parliament’s approval) is likely to jeopardise demand and/or weigh on the company’s margins. If passed, management expects a EGP140mn hit on its profitability, with plans to mitigate its impact, via passing it on indirectly or directly, depending on each segment’s price sensitivity and competitive landscape.