Egypt food stocks | Time to align valuation with growth
Sector trading on rich valuation, Obour Land an outlier. The recent rally in consumer names, fuelled by substantial q-o-q volume recovery in 3Q17, left most valuations stretched. We expedite the pace of volume recovery across our coverage universe. Obour Land’s share price lag to the market, penalised, in our view, by its low liquidity, widened its gap to peers with 2018 P/E of 14x vs. peers’ 20x and Domty’s 17x. Against the norm, Obour Land grew its volume 9% y-o-y in 3Q17 and maintained a healthy GPM of 22%, despite pricing its inventory at spot FX rate. Obour Land remains our top pick within the sector; we reiterate our OW call on 15% higher TP of EGP23/share on better volumes.
Time to take profit in Juhayna. The stock rallied 43% since we upgraded to OW in Aug-17; accordingly, we downgrade our rating to Neutral. Management is on track to lower headcount by 20% by the end of 2017, aiming to trim overheads. The company stands to benefit from the expected cut in interest rates by the CBE (net interest expense/EBITDA of 42%). However, on 2018e P/E of 21x, Juhayna trades broadly in line with peers, adjusted for growth.
Still cautious on discretionary spending. Aggressive competition from new entrants to the juice and snacks segments would deter the pace of recovery, in our view. We remain Neutral on Edita and cut our TP to EGP17/share (-15%) on stalling volume and margin recovery; we assume volume will bounce back to 2016’s level by 2019. The stock is rich on valuation, with 2018e P/E of 29x, ahead of peers’ 23x. We expect juice and milk sales to contribute EGP184mn to Obour Land in 2018e (7% of top line) at a blended GPM of 18.3%, implying a 26% and 4pp discount to management revenue and GPM guidance, respectively.
It’s all about the currency. With 55%-80% of CoGS FCY-linked, directly and indirectly, a faster-than-expected appreciation of USD:EGP is a key upside as lower prices (likely through promotions) would stimulate demand. We assume an average USD:EGP rate of 16.0 in 2018e. Prolonged high interest rates pose a key risk to our earnings estimates for highly leveraged companies, mainly Domty and Juhayna.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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