EUR 21.58 For Business Accounts Only

JUFO EY | Aligning valuation with diversification; Remain OW

A play on consumption normalisation. We cut our TP by 20% to EGP10.0/share, as the prolonged consumption recovery, amid COVID-19 implications, warrants a c26% trim to our 2020-24e EBIT forecasts. Nonetheless, we look for a recovery in revenue trends in 2021e, as economic activity approaches normalcy, with juice beating other segments, from a low base, and view the acceleration of the pace of conversion to packaged from loose milk as a medium-term story. This fuels 2020-22e EPS CAGR of 23%, along with the lower cost of debt, on continued deleveraging (2021e ND/equity of 0.2x vs. 0.3x in 2020e), and favourable rate environment (-4pp in 2020). Juhayna trades on a 2021e P/E of 13x, 45% discount to global peers, falling to 10.9x in 2022e.

Growth returning. We look for a gradual top line recovery from lacklustre 2020e, rising 11% p.a. over 2020-22e (vs. -1% in 2020). This is driven by: i) improved affordability, translating into volume growth and scaling discounts, ii) a gradual recovery in the juice segment, amid traffic normalisation, and supported by its rebranding (pushed to 2021e vs. 2020), and iii) ramping up third-party distribution sales (signed a three-year agreement with Rabea tea in Jun-20), contributing c3% of 2024e sales, with room to surprise, on securing further contracts (1-2 in pipeline). Upsides stem from the launch of a new high-end category early 2021, with assured short-term profitability, new SKU innovations, and faster-than-expected packaged milk conversion (51% of market).

Scope for recovery, despite 2021e cost pressures. We see EBITDA margins normalising at a lower 16.1% in 2021-22e and 16.4% beyond (vs. 16.8% in 2020e), weighed by rising raw material prices and potential EGP depreciation (40-50% FCY exposure). Yet, reaping fruits of cost optimisation efforts, including the last round of layoffs (-7% to c4k, EGP25mn p.a. savings, starting 2021e), along with rationalising discounts should partially offset the higher marketing, to support new launches and maintain market share. Better inventory management (67 DoH over 2021-25e vs. 75 in 2019 and 70 in 2020e), on lower SMP reliance (20-25% vs. c40% previously), should limit working capital needs and sustain deleveraging, driving 27% of 2021e NI growth.

Solid 4Q20 can be a catalyst. We expect strong 4Q20e earnings growth (+2.3x y-o-y), and still see current level as attractive, as Juhayna’s share price only re-rated a minor c1% since the detention of the company’s Chairman in Dec-20. We are unalarmed by potential business disruption, thanks to the strong management team, with a new Chairman appointed, clearing the overhang on the stock, amid these allegations.