EUR 25.64 For Business Accounts Only

OLFI EY | An overlooked value name; Maintain Overweight

Outperformer, operating far from the crowd. We raise our 12M TP by c9% to EGP9.80/share, as we rollover our DCF, factoring c1pp higher 2020-24e EBITDA margins, on average, mitigating the lower-than-expected cheese prices (+c2% in 2020e vs. c6% previously), as the favourable commodities’ prices warranted minor hikes in 2020e. We look for a 2020-24e EPS CAGR of c10%, despite assuming a sustainably high SG&A-to-sales to back new ventures (average of 8.2% vs. 7.9% in 2020e). We are buyers of the stock, thanks to its: i) outstanding distribution strategy, ii) new innovative launches, iii) lean cost structure, along with iv) offering the highest dividend yield among our food coverage of 8.5% in 2021e. The stock trades on an unjustifiable valuation of 8.5x 2021e P/E, well below peers’ 22x.

Recovery in place, powered by innovation. We expect Obour Land to maintain its market share (c40%), thanks to its focus on: i) rural areas (75% of sales), with higher per capita cheese demand vs. Greater Cairo, and ii) innovative launches, such as the recently introduced “Mafrooda” processed cheese product in 2H20, as well as product differentiation (easy-open feature, delayed to 2021-22 vs. mid-2020, previously). This should strengthen the company’s leading position, making it less exposed to risk of new entrants, and normalising volume growth at c4% p.a. (vs. c6% previously), despite the saturated cheese market (80% packaged cheese), driving 2020-24e revenue CAGR of c10% (vs. c13% previously).

A transition phase; Keep tabs on new ventures. Following the 2x y-o-y volumes surge witnessed in the milk segment in 9M20, we expect milk revenue to grow at a 2020-24e CAGR of c22%, making up c7% of 2024e sales (vs. 3% in 2019). We attribute this to solid market share gains (+1.3pp y-o-y to 2.7% in 2020e), to be further solidified by the launch of flavoured milk (200ml) by 2021e. We flag juice performance is a swing factor that could surprise amid the strategy revision, which should reap fruits in 2021e (+20% sales CAGR over 2020-24e, c2% of 2024e sales).

Driving volumes at cost; Commodity price hikes a watch factor. We look for a GPM of 21.6% (-90bps y-o-y) in 2021e, gradually recovering to 22.4% by 2024e, pressured by the: i) foreseen hike in raw material prices, warranting a 1pp y-o-y contraction in the cheese segment’s GPM to 22% in 2021e, and expanding c20bps, on average, beyond to 22.6% by 2024e, on resumption of price hikes (+5% p.a.), and ii) ongoing promotions to spur new ventures demand.