Egypt dairy sector
Consumer | Egypt MENA research
2018e: a step up increase in earnings Juhayna
Target price (EGP)
Overweight
11.8
Current price (EGP) 9.0
This note is the corrected version of our dairy sector note initially published Potential return 30.6%
on 31 October 2017. The changes include Domty’s correct number of shares, Bloomberg JUFO EY
which cuts our target price c11% to EGP10.8/share. Reuters JUFO.CA
Mcap (EGPm) 8,473
3Q17 numbers show promising signs of demand recovery; 2018e Mcap (USDm) 480
could bring unprecedented earnings as margins rebound Free float 50.6%
Daily volume (USDm) 0.391
We raise our 12M TP c110% for Juhayna to EGP11.8/share and c27% Note: All prices as of 29 October 2017
for Domty to EGP10.8/share, and upgrade both stocks to Overweight
Domty Overweight
Valuation is compelling for the 2 companies, but we favor Juhayna on Target price (EGP) 10.8
a higher potential return Current price (EGP) 9.0
Potential return 19.8%
Staples demand starts to recover: In the aftermath of the EGP flotation, Bloomberg DOMT EY
soaring inflation and lagging wage increases continue to weigh down on Reuters DOMT.CA
private consumption, with volumes across the majority of our consumers Mcap (EGPm) 2,555
coverage universe witnessing double‐digit declines in the first half of the Mcap (USDm) 145
year. We expect weak volumes to persist until consumers adjust their Free float 43.0%
Daily volume (USDm) 0.339
budget and acclimatize to new price points, but we also believe staples
Note: All prices as of 29 October 2017
stand a higher chance of a faster recovery, as already evident in Juhayna
and Domty’s 3Q17 results. That said, we forecast full volume recovery for
Price performance
both companies in 2018e, aided by our view that inflation will moderate to
an average c15%, and private consumption growth will pick up on the back 270
240
of lower unemployment and policy rate cuts. Despite intensified
210
competition in the cheese market, we expect Domty’s volumes to recover 180
faster than that of Juhayna’s, as its main products remain the cheapest 150
source of protein, and serve as a minimal‐prep meal, which is more suitable 120
for busy lifestyles and long commuting times in Egypt. 90
O N D J F M A M J J A S O
DOMT JUFO EGX
Aggressive margin rebound for Domty: In our last macro note entitled
Growing need for currency appreciation, published on 2 July 2017, we
estimated the EGP to strengthen to an average 15.50/USD in 2018e, which
should reflect positively on both companies’ margins. Nevertheless, with
Juhayna already securing its whole milk powder needs for 2017e at a 20%
discount to the 2018e future contract price and at a favorable EGP/USD 31 October 2017
rate of 15.00–16.00, we expect the company to face a c7% y‐o‐y increase in
its blended milk cost, limiting the scope of margin expansion. As for Domty, Noha Baraka, CFA
we estimate a c13% y‐o‐y drop in its blended milk cost, aided by its relative Analyst
heavy reliance on imported skimmed milk powder, and as it fully restores +202 3535 7366
its raw milk price discount advantage. This implies a sizable 6.8 pp noha.baraka@hc‐si.com
expansion in its gross profit margin, despite the lack of further selling price
Please refer to important
increases. Longer term, we expect both companies’ margins to converge to
disclosures and analyst
their historical averages, with Juhayna to continue having superior margins certifications on pages 16–18
to Domty. of this report.
Egypt dairy sector
Consumer | Egypt
31 October 2017
We prefer Juhayna over Domty: We raise our valuation for both companies
on a lower cost of capital, in line with our expectations of interest rate cuts,
and as we roll over our forecast period 1 year. We have also added a 1‐year
semi‐explicit period to our forecasts in both companies to account for the
lower growth in perpetuity, which had a significant impact on our FCF
calculation for the terminal year. We raise our 12‐month target price for
Juhayna c110% to EGP11.8/share, which puts the company at a 2018e P/E
multiple of 22.1x and EV/EBITDA multiple of 10.1x, and offers a potential
return of c31%. We therefore upgrade the stock to Overweight from
Underweight. For Domty, we raise our 12‐month target price c27% to
EGP10.8/share, which puts the company at a 2018e P/E multiple of 12.4x
and EV/EBITDA multiple of 8.6x, and offers a potential return of c20%. We
therefore upgrade the stock to Overweight from Neutral. In our view,
valuation for both stocks is compelling, with Juhayna trading at a c49%
discount to its peers’ implied 2018e EV/EBITDA multiple and c45% discount
to its peers’ implied P/E multiple, and Domty trading at a c47% discount
and a c59% discount, respectively. We choose Juhayna to be our top pick
within the dairy sector on a higher potential return.
2
Egypt dairy sector
Consumer | Egypt
31 October 2017
Valuation summary
2017e 2018e 2019e 2017e 2018e 2019e
12M TP MP Potential 2017e 2018e 2019e 2017e 2018e 2019e
Stock Rating dividend Dividend Dividend FCF FCF FCF
(EGP) (EGP) return (%) P/E P/E P/E EV/EBITDA EV/EBITDA EV/EBITDA
yield yield yield yield yield yield
JUFO OW 11.8 9.0 30.6% 38.1x 16.9x 9.5x 11.4x 8.1x 5.4x 0.8% 1.8% 5.3% 6.2% 5.4% 9.6%
DOMT OW 10.8 9.0 19.8% 51.6x 10.3x 7.1x 18.7x 7.4x 5.5x 0.3% 2.6% 5.7% ‐9.3% 3.0% 8.6%
Source: HC
Rating changes
Company New recommendation Old recommendation Reason for change
JUFO Overweight Underweight Upgrade to Overweight on strong margin recovery and lower WACC
DOMT Overweight Neutral Upgrade to Overweight on strong margin recovery and lower WACC
Source: HC
3
Egypt dairy sector
Consumer | Egypt
31 October 2017
Estimates summary (EGPm)
2016 2017e 2018e 2019e 2020e 2021e 2022e
JUFO DOMT JUFO DOMT JUFO DOMT JUFO DOMT JUFO DOMT JUFO DOMT JUFO DOMT
Total volume (000’s tons) 514 151 442 139 511 163 595 190 676 222 770 250 876 283
Revenue 4,993 1,702 6,228 2,337 7,553 2,860 9,266 3,368 10,967 4,030 12,775 4,564 14,883 5,180
Gross profit 1,454 335 1,862 456 2,333 751 2,990 913 3,486 1,026 4,076 1,154 4,760 1,301
EBITDA 652 98 910 179 1,255 443 1,777 568 2,118 639 2,531 719 3,014 811
Net profit 54 26 222 50 500 248 890 358 1,158 429 1,472 507 1,834 592
Blended milk cost (EGP/ton) 3,760 2,558 5,662 5,006 6,029 4,360 6,296 4,191 6,786 4,585 6,905 4,772 7,115 4,968
Source: HC
Growth (% y‐o‐y)
2016 2017e 2018e 2019e 2020e 2021e 2022e
JUFO DOMT JUFO DOMT JUFO DOMT JUFO DOMT JUFO DOMT JUFO DOMT JUFO DOMT
Total volume (000’s tons) 9.7 6.9 ‐14.1 ‐8.2 15.8 17.7 16.3 16.5 13.8 16.7 15.3 12.8 13.8 13.1
Revenue 18.0 21.6 24.7 37.3 21.3 22.3 22.7 17.8 18.4 19.6 16.5 13.3 16.5 13.5
Gross profit ‐1.8 ‐8.4 28.0 35.9 25.3 64.8 28.2 21.5 16.6 12.3 16.9 12.3 16.8 12.7
EBITDA ‐22.7 ‐55.1 39.6 82.4 38.0 147 41.5 28.1 19.2 12.5 19.5 12.6 19.1 12.8
Net profit ‐80.9 ‐80.1 316 93.6 125 400 78.0 44.6 30.1 19.8 27.1 18.1 24.6 16.8
Blended milk cost (EGP/ton) ‐3.0 1.9 50.6 95.7 6.5 ‐12.9 4.4 ‐3.9 7.8 9.4 1.8 4.1 3.0 4.1
Source: HC
Estimates revision (%)
2017e 2018e 2019e 2020e 2021e
JUFO DOMT JUFO DOMT JUFO DOMT JUFO DOMT JUFO DOMT
Total volume (000’s tons) ‐10.7 ‐4.6 ‐4.4 ‐0.1 ‐0.5 0.2 1.3 0.5 3.1 ‐0.1
Revenue ‐15.5 ‐13.4 ‐10.2 ‐5.4 ‐3.6 ‐2.4 ‐0.2 1.5 1.9 1.6
Gross profit 2.7 ‐0.3 8.9 ‐1.7 11.2 ‐5.3 12.0 ‐2.2 11.1 3.3
EBITDA ‐1.7 ‐11.7 9.6 ‐8.3 13.5 ‐12.8 14.9 ‐8.8 13.2 ‐0.9
Net profit 21.2 ‐46.2 61.1 ‐14.5 50.1 ‐14.8 45.1 ‐6.2 38.2 7.3
Blended milk cost (EGP/ton) ‐6.3 1.7 0.1 ‐4.4 3.1 ‐5.7 8.3 ‐1.2 7.8 ‐1.2
Source: HC
4
Egypt dairy sector
Consumer | Egypt
31 October 2017
Juhayna financial statements and ratios (EGPm)
2016 2017e 2018e 2019e 2020e 2021e 2022e
Income statement
Revenue 4,993 6,228 7,553 9,266 10,967 12,775 14,883
%Δ y‐o‐y 18.0% 24.7% 21.3% 22.7% 18.4% 16.5% 16.5%
EBITDA 652 910 1,255 1,777 2,118 2,531 3,014
%Δ y‐o‐y ‐22.7% 39.6% 38.0% 41.5% 19.2% 19.5% 19.1%
EBITDA margin 13.1% 14.6% 16.6% 19.2% 19.3% 19.8% 20.3%
EBIT 417 646 972 1,469 1,786 2,174 2,633
%Δ y‐o‐y ‐34.6% 54.8% 50.5% 51.1% 21.6% 21.7% 21.1%
EBIT margin 8.4% 10.4% 12.9% 15.9% 16.3% 17.0% 17.7%
Profit before taxes 149 276 696 1,239 1,612 2,049 2,553
Taxes (95) (53) (195) (348) (453) (576) (717)
Net profit 54 222 500 890 1,158 1,472 1,834
Net profit margin 1.1% 3.6% 6.6% 9.6% 10.6% 11.5% 12.3%
EPS (EGP) 0.06 0.24 0.53 0.95 1.23 1.56 1.95
%Δ y‐o‐y ‐80.9% 315.7% 124.7% 78.0% 30.1% 27.1% 24.6%
DPS (EGP) 0.15 0.07 0.16 0.47 0.80 1.17 1.56
DPO (%) 264% 30.0% 30.0% 50.0% 65.0% 75.0% 80.0%
Balance sheet
Cash and equivalents 130 109 211 687 1,181 1,823 2,631
Inventory 1,326 1,070 1,260 1,491 1,746 1,992 2,273
Receivables 123 220 267 327 387 451 525
Other current assets 247 255 302 366 430 497 576
Total current assets 1,826 1,653 2,039 2,870 3,744 4,764 6,005
Net fixed assets 3,066 3,063 3,179 3,271 3,339 3,383 3,402
Other noncurrent assets 603 570 571 574 574 576 578
Total noncurrent assets 3,670 3,633 3,750 3,845 3,913 3,959 3,980
Total assets 5,495 5,286 5,789 6,715 7,657 8,723 9,985
Overdraft and CPLTD 1,366 1,393 1,556 1,720 1,851 1,966 2,226
Payables 400 337 405 490 587 685 800
Other current liabilities 271 339 581 1,074 1,538 2,065 2,631
Current liabilities 2,037 2,069 2,543 3,284 3,976 4,716 5,657
Long‐term debt 804 623 337 115 0 0 0
Other noncurrent liabilities 363 353 353 353 353 353 353
Total noncurrent liabilities 1,167 976 690 468 353 353 353
Total liabilities 3,203 3,045 3,233 3,752 4,329 5,069 6,010
Total shareholder equity 2,292 2,242 2,556 2,963 3,328 3,654 3,975
Cash flow statement
Net income before tax 149 276 696 1,239 1,612 2,049 2,553
Noncash items 428 635 589 568 537 512 492
Net change in working capital (726) 30 (183) (229) (236) (232) (264)
Operating cash flows (378) 536 754 1,152 1,391 1,752 2,126
Net CAPEX (551) (271) (400) (403) (400) (402) (402)
Other investments 94 71 0 0 0 0 0
Investing cash flows (458) (200) (400) (403) (400) (402) (402)
Financing cash flows 64 (357) (252) (273) (496) (707) (917)
Change in cash (665) (21) 102 476 495 642 807
Key indicators
Net debt/equity 0.9x 0.9x 0.7x 0.4x 0.2x 0.0x N/A
EV/EBITDA 16.1x 11.4x 8.1x 5.4x 4.3x 3.4x 2.7x
P/E 158x 38.1x 16.9x 9.5x 7.3x 5.8x 4.6x
Dividend yield 1.7% 0.8% 1.8% 5.3% 8.9% 13.0% 17.3%
FCF yield 4.2% 6.2% 5.4% 9.6% 12.7% 16.6% 20.7%
Source: Company data, HC
5
Egypt dairy sector
Consumer | Egypt
31 October 2017
Domty financial statements and ratios (EGPm)
2016 2017e 2018e 2019e 2020e 2021e 2022e
Income statement
Revenue 1,702 2,337 2,860 3,368 4,030 4,564 5,180
%Δ y‐o‐y 21.6% 37.3% 22.3% 17.8% 19.6% 13.3% 13.5%
EBITDA 98 179 443 568 639 719 811
%Δ y‐o‐y ‐55.1% 82.4% 146.9% 28.1% 12.5% 12.6% 12.8%
EBITDA margin 5.8% 7.7% 15.5% 16.8% 15.8% 15.8% 15.7%
EBIT 64 129 384 501 562 633 714
%Δ y‐o‐y ‐8.4% 103.1% 197.6% 30.3% 12.3% 12.5% 12.8%
EBIT margin 3.7% 5.5% 13.4% 14.9% 14.0% 13.9% 13.8%
Profit before taxes 35 68 320 462 554 654 764
Taxes (9) (18) (72) (104) (125) (147) (172)
Net profit 26 50 248 358 429 507 592
Net profit margin 1.5% 2.1% 8.7% 10.6% 10.6% 11.1% 11.4%
EPS (EGP) 0.09 0.18 0.88 1.27 1.52 1.79 2.09
%Δ y‐o‐y ‐80.1% 93.6% 400.2% 44.6% 19.8% 18.1% 16.8%
DPS (EGP) ‐ 0.04 0.26 0.57 0.76 0.90 1.18
DPO (%) 0.0% 20.0% 30.0% 45.0% 50.0% 50.0% 50.0%
Balance sheet
Cash and equivalents 288 182 333 630 895 1,178 1,508
Inventory 274 322 361 420 515 585 665
Receivables 371 528 607 669 745 782 816
Other current assets 172 232 282 331 397 450 511
Total current assets 1,105 1,265 1,583 2,051 2,553 2,994 3,500
Net fixed assets 353 412 449 486 530 565 603
Other noncurrent assets 175 227 197 167 137 107 77
Total noncurrent assets 529 640 646 653 668 672 680
Total assets 1,634 1,904 2,228 2,704 3,220 3,667 4,180
Overdraft and CPLTD 810 985 1,075 1,210 1,402 1,517 1,663
Payables 97 147 164 192 235 267 303
Other current liabilities 110 165 253 376 455 522 579
Current liabilities 1,017 1,298 1,492 1,778 2,091 2,306 2,546
Long‐term debt 15 5 0 0 ‐ ‐ ‐
Other noncurrent liabilities 103 67 44 55 61 61 64
Total noncurrent liabilities 118 72 44 55 61 61 64
Total liabilities 1,135 1,370 1,537 1,833 2,152 2,367 2,610
Total shareholder equity 499 534 692 871 1,068 1,300 1,571
Cash flow statement
Net income before tax 35 68 320 462 554 654 764
Noncash items 63 155 145 131 115 100 86
Net change in working capital (344) (223) (174) (142) (190) (124) (153)
Operating cash flows (307) (111) 168 315 336 491 561
Net CAPEX (109) (141) (65) (74) (91) (91) (104)
Other investments 1 3 ‐ ‐ ‐ ‐ ‐
Investing cash flows (108) (138) (65) (74) (91) (91) (104)
Financing cash flows 762 143 47 56 19 (117) (126)
Change in cash 260 (106) 150 297 265 283 330
Key indicators
Net debt/equity 1.1x 1.5x 1.1x 0.7 x 0.5x 0.3x 0.1x
EV/EBITDA 31.4x 18.7x 7.4x 5.5x 4.8x 4.0x 3.3x
P/E 99.9x 51.6x 10.3x 7.1x 6.0x 5.0x 4.3x
Dividend yield 0.0% 0.3% 2.6% 5.7% 7.6% 8.9% 10.4%
FCF yield ‐11.2% ‐9.3% 3.0% 8.6% 9.8% 14.2% 15.6%
Source: Company data, HC
6
Egypt dairy sector
Consumer | Egypt
31 October 2017
Dairy sector overview
Spiraling inflation weighs down on consumer spending, but demand for staples
showing early signs of recovery
We differentiate between stocks based on their pricing strategy and cost structure,
and expect Domty to recover faster than Juhayna
Juhayna is our top pick within the dairy sector on a higher potential return
We expect demand to fully recover in 2018e…
In our Egypt consumer sector note entitled Ratings downgrade on higher cost of capital
and lower consumer demand, published on 4 December, we argued that the fiscal
consolidation and austerity measures required for Egypt’s reform program would see
spiraling inflationary pressures. Inflation soared following the EGP floatation, peaking at
33.0% in July, the highest level since at least 2005, before dropping to 31.9% in August
and 31.6% in September. Our consumer universe has largely suffered from mounting
costs, especially those with high dependency on imported inputs. This has caused many
companies to increase their retail prices for their product offerings, with the goal to
restore margins, leading, in some cases, to demand destruction. Market indicators have
shown that private consumption growth slowed down in 1Q17, growing at 3.2% y‐o‐y,
compared with a growth of 5.0% during the same quarter a year earlier. Additionally,
average wages have increased 15%–20%, not matching the rise in consumer prices.
Throughout 1H17, Juhayna has increased its dairy prices c35%, yogurt c43%, and juice
c39%, with volumes dropping, c21%, c22%, and c35%, respectively, on our calculations.
Domty’s prices similarly jumped over c40%, also at the expense of volumes, which,
according to our calculation, have dropped c26% for cheese and c31% for juice. We still
believe consumer demand is likely to remain depressed for the rest of 2017e,
exacerbated by inflationary pressures following the government’s recent decisions to
reduce energy subsidies as well as the 1 pp increase in the value‐added tax (VAT) rate to
14%. Nevertheless, we expect to see some improvement in 2H17e over 1H17 as prices
stabilize and households accommodate the higher price‐levels and adjust their spending
needs in a more price‐conscious manner. This was evident in Juhayna and Domty’s 3Q17
numbers, with both companies not increasing prices, and volumes relatively better off in
terms of losses, according to management. Going into 2018e, we expect volumes to
recover as Egypt’s economic reforms come to fruition, inflation moderates to c15%, and
the Central Bank of Egypt starts cutting back its interest rates.
In the short term, we expect Domty to make up for its lost sales faster than Juhayna as
the company plans to re‐engineer its distribution network and boost its retail sales by
penetrating new areas. Additionally, with cheese being a low‐cost food high in protein,
we believe consumers view cheese products, such as those offered by Domty, as
necessities compared with Juhayna’s range of dairy products. Furthermore, we expect to
see a continuation of slower conversion from loose to packed milk and yogurt products
given their higher price premiums.
7
Egypt dairy sector
Consumer | Egypt
31 October 2017
Volume growth (% y‐o‐y)
40%
30%
20%
10%
0%
‐10%
‐20%
2015 2016 2017e 2018e 2019e 2020e 2021e 2022e
Juhayna Domty
Source: Company data, HC
…and margins to rebound to historical averages
Since the beginning of the year, feed cost prices (corn and soybean) were largely flat y‐o‐
y, and the 2018e outlook on agriculture fundamentals is expected to be characterized by
increased supply on higher milk‐cow heads that is unmatched by the slowdown in
demand growth. Over the same period, the average winning contract price of whole milk
powder (WMP) from New Zealand dropped c12%, while skimmed milk powder (SMP)
dropped c25%, with 2018e future contracts implying they will remain subdued. This
suggests a favorable outlook on raw and powdered milk prices. Accordingly, we believe
there is a strong case for margin expansion in the short term. This is further
complemented by the benefits reaped from the ongoing economic reforms, the expected
high foreign inflows that suggest a more stable FX environment and lower effective
EGP/USD rate (EGP15.50/USD), and inflation moderating to c15%. Longer term, futures
suggest that the milk outlook will be on the rise, aided by the rebound in global demand.
However, we are not very concerned given that most companies are expected to
continue to push for some price increases, in our view. Thus, we expect both companies’
margins will converge back to historical averages, while Juhayna will continue to have
superior margins compared to Domty.
8
Egypt dairy sector
Consumer | Egypt
31 October 2017
Whole milk powder (USD/ton) Juhayna’s raw milk prices (EGP/ton)
4,000 40% 8,000 50%
1,000 2,000 0%
‐30%
5,500
40%
80%
2,500 5,000
30%
4,500
60%
20%
2,000 4,000
1,500 3,000
0%
20%
2,500
‐10%
1,000 2,000
0%
‐20% 1,500
WMP, this nullifies our previous concern of a less favorable split. That said, we expect our
2019–22e blended milk cost/ton to grow at a CAGR of only c4%. Our new estimates point
to a 3‐year gross profit CAGR of c17%, meaning a long‐term margin of 32.0%, which is
broadly in line with the company’s 8‐year historical average.
Juhayna’s blended milk costs to remain nearly flat (EGP/ton)
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2017e 2018e 2019e 2020e 2021e
New estimates Old estimates
Source: HC
Falling powder milk prices and expected EGP appreciation allow for faster margin
recovery for Domty
We believe record low margins reported in 1H17 are unsustainable throughout the rest
of 2017e as they were largely a function of exceptionally high raw milk prices the
company procured at the beginning of year. According to management, Domty usually
secures its raw milk needs at a c20% discount to market prices (cheese products primarily
rely on SMP and a different grade of raw milk), but this was not the case in 1H17. Despite,
Domty resuming taking advantage of its raw milk price discount, margins have remained
depressed in 3Q17, mainly on the back of a surge in other non‐milk costs. In our view, the
raw milk discount, along with the expected EGP appreciation, should reflect positively on
the company’s costs in the short term. We therefore expect our blended milk cost/ton
estimates to drop c13% y‐o‐y in 2018e and another c4% in 2019e. Also, the price
increases that were carried out in 1H17 should fully reflect on 2018e numbers, further
supporting our view that Domty will see both higher margins and a faster margin
recovery over Juhayna. The company’s margin recovery is further aided by its attempts to
boost retail sales and a more stable FX environment. That said, we expect Domty’s gross
profit margin to stand at 26.3% in 2018e and 27.1% in 2019e. Looking beyond 2019e,
Domty should be able to sustain high margins, though lower than 2019e levels, in our
view, as we believe further price increases will be required following a resurgence in milk
prices and a less favorable split between raw milk and SMP, along with normal cost
inflation for other inputs sourced locally. This filters through to a 3‐year gross profit CAGR
of c13%, leaving margins to stand at 25.1% by 2022e, in line with their 5‐year historical
average of c25%.
10
Egypt dairy sector
Consumer | Egypt
31 October 2017
We slightly cut Domty’s blended milk costs as the higher EGP/USD rate partially offsets a favorable cost
outlook (EGP/ton)
5,200
5,000
4,800
4,600
4,400
4,200
4,000
3,800
3,600
2017e 2018e 2019e 2020e 2021e
New estimates Old estimates
Source: HC
Gross profit (EGPm)
2016 2017e 2018e 2019e 2020e 2021e 2022e
JUFO 1,454 1,862 2,333 2,990 3,486 4,076 4,760
% y‐o‐y ‐1.8% 28.0% 25.3% 28.2% 16.6% 16.9% 16.8%
DOMT 335 456 751 913 1,026 1,154 1,301
% y‐o‐y ‐8.4% 35.9% 64.8% 21.5% 12.3% 12.5% 12.7%
Source: Company data, HC
Gross profit margin
2016 2017e 2018e 2019e 2020e 2021e 2022e
JUFO 29.1% 29.9% 30.9% 32.3% 31.8% 31.9% 32.0%
% y‐o‐y ‐5.9 pp 0.8 pp 1.0 pp 1.4 pp ‐0.5 pp 0.1 pp 0.1 pp
DOMT 19.7% 19.5% 26.3% 27.1% 25.5% 25.3% 25.1%
% y‐o‐y ‐6.5 pp ‐0.2 pp 6.8 pp 0.8 pp ‐1.7 pp ‐0.2 pp ‐0.2 pp
Source: Company data, HC
2017–20e gross profit margin revision
2017e 2018e 2019e 2020e
Old New %Δ Old New %Δ Old New %Δ Old New %Δ
JUFO 24.6% 29.9% 5.3 pp 25.5% 30.9% 5.4 pp 28.0% 32.3% 4.3 pp 28.3% 31.8% 3.5 pp
DOMT 16.9% 21.3% 4.4 pp 25.3% 27.6% 2.3 pp 27.9% 28.2% 0.3 pp 26.4% 26.1% ‐0.3 pp
Source: HC
11
Egypt dairy sector
Consumer | Egypt
31 October 2017
SG&A expenses on the rise, more so for Domty
Due to fiercer competition in the cheese segment, we expect Domty to spend more on
SG&A expenses to regain market share lost following the EGP flotation due to its
aggressive pricing strategy. Juhayna, meanwhile, has been capitalizing on its strong brand
equity and market position and showed great resilience, with the company maintaining
its market share across its product ranges during the latest FX headwinds, compared to
its levels pre‐devaluation. We therefore raise our 2018–21e SG&A expenses c10% for
Domty, leaving our EBITDA estimates c6% lower, and raise our SG&A expenses only c7%
for Juhayna, filtering through to a c10% upward revision to our 2018–21e EBITDA
estimates. Finally, we cut our EPS estimates for Domty an average c6% over the same
period, but raise Juhayna’s an average c39% due to dropping net financing costs, backed
by the decreased debt position, along with the expected policy rate cuts.
2017–20e Juhayna’s EPS estimates revision (EGPm)
2017e 2018e 2019e 2020e
Old New %Δ Old New %Δ Old New %Δ Old New %Δ
Revenue 7,369 6,228 ‐15.5% 8,412 7,553 ‐10.2% 9,614 9,266 ‐3.6% 10,989 10,967 ‐0.2%
Gross profit 1,813 1,862 2.7% 2,143 2,333 8.9% 2,689 2,990 11.2% 3,113 3,486 12.0%
Gross margin 24.6% 29.9% 5.3 pp 25.5% 30.9% 5.4 pp 28.0% 32.3% 4.3 pp 28.3% 31.8% 3.5 pp
SG&A expense (1,131) (1,211) 7.1% (1,266) (1,356) 7.1% (1,418) (1,519) 7.1% (1,589) (1,701) 7.1%
EBITDA 926 910 ‐1.7% 1,146 1,255 9.6% 1,565 1,777 13.5% 1,844 2,118 14.9%
EBITDA margin 12.6% 14.6% 2.0 pp 13.6% 16.6% 3.0 pp 16.3% 19.2% 2.9 pp 16.8% 19.3% 2.5 pp
Net financing (408) (371) ‐9.1% (426) (276) ‐35.2% (425) (230) ‐45.9% (392) (174) ‐55.6%
Net profit 184 222 21.2% 310 500 61.1% 593 890 50.1% 798 1,158 45.1%
Net margin 2.5% 3.6% 1.1 pp 3.7% 6.6% 2.9 pp 6.2% 9.6% 3.4 pp 7.3% 10.6% 3.3 pp
Source: HC
2017–20e Domty’s EPS estimates revision (EGPm)
2017e 2018e 2019e 2020e
Old New %Δ Old New %Δ Old New %Δ Old New %Δ
Revenue 2,700 2,337 ‐13.4% 3,022 2,860 ‐5.4% 3,452 3,368 ‐2.4% 3,972 4,030 1.5%
Gross profit 457 456 ‐0.3% 765 751 ‐1.7% 965 913 ‐5.3% 1,050 1,026 ‐2.2%
Gross margin 16.9% 19.5% 2.6 pp 25.3% 26.3% 1.0 pp 27.9% 27.1% ‐0.8 pp 26.4% 25.5% ‐1.0 pp
SG&A expense (305) (332) 9.0% (342) (374) 9.4% (383) (421) 9.9% (429) (473) 10.4%
EBITDA 203 179 ‐11.7% 483 443 ‐8.3% 651 568 ‐12.8% 700 639 ‐8.8%
EBITDA margin 7.5% 7.7% 0.1 pp 16.0% 15.5% ‐0.5 pp 18.9% 16.8% ‐2.0 pp 17.6% 15.8% ‐1.8 pp
Net financing (80) (107) 33.8% (101) (86) ‐14.6% (99) (64) ‐35.7% (99) (39) ‐60.6%
Net profit 92 50 ‐46.2% 290 248 ‐14.5% 420 358 ‐14.8% 458 429 ‐6.2%
Net margin 3.4% 2.1% ‐1.3 pp 9.6% 8.7% ‐0.9 pp 12.2% 10.6% ‐1.5 pp 11.5% 10.6% ‐0.9 pp
Source: HC
12
Egypt dairy sector
Consumer | Egypt
31 October 2017
Upgrade Juhayna and Domty to Overweight on compelling
valuations
We raise our valuation for both companies on lower cost of capital, in line with our
expectations of interest rate cuts, and as we roll over our forecast period 1 year. We have
also added a 1‐year semi‐explicit period to our forecasts to account for the lower growth
in perpetuity compared to 2022e (4.5% versus c25%), which had a significant impact on
our FCF calculation for the terminal year.
For Juhayna, we raise our 12‐month target price c110% to EGP11.8/share. Our new TP
implies a 2018e P/E multiple of 22.1x and EV/EBITDA multiple of 10.1x and offers a
potential return of c31% over the 29 October closing price of EGP9.0/share. We therefore
upgrade the stock to Overweight from Underweight. The company currently trades at a
2018e P/E multiple of 16.9x, which is a c45% discount to its peers’ implied multiple of
30.7x based on Juhayna’s 2018–20e EPS CAGR of c52%. The company also trades at a
2018e EV/EBITDA multiple of 8.1x, which is a c49% discount to its peers implied multiple
of 15.7x.
For Domty, we raise our 12‐month target price c27% to EGP10.8/share. Our new TP
implies a 2018e P/E multiple of 12.4x and EV/EBITDA multiple of 8.6x and offers a positive
potential return of c20% over the 29 October closing price of EGP9.0/share. We therefore
upgrade the stock to Overweight from Neutral. In our view, current valuation is
compelling, with the stock trading at a 2018e EV/EBITDA multiple of 7.4x, which is a c47%
discount to its peers’ implied multiple of 14.0x, and a 2018e P/E multiple of 10.3x, which
is c59% discount to its peers’ implied multiple of 25.3x.
The high discounts indicate that the market is not pricing in both companies’ high growth
prospects, further solidifying our Overweight position. We choose Juhayna to be our top
pick within the dairy sector on a higher potential return.
13
Egypt dairy sector
Consumer | Egypt
31 October 2017
Domty trades at a c47% discount to its peers’ implied …and at a c59% discount to its peers’ implied 2018e
2018e EV/EBITDA multiple versus Juhayna’s c49%... P/E multiple versus Juhayna’s c45%
25x
45x
40x
20x
35x
30x
2018e EV/EBITDA
15x
25x
2018e P/E
20x
10x
Juhayna
Juhayna 15x
Domty
5x 10x
Domty
5x
0x 0x
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 0.0% 20.0% 40.0% 60.0% 80.0%
2018–20e EBITDA CAGR 2018–20e EPS CAGR
Source: Bloomberg, HC Source: Bloomberg, HC
Juhayna DCF valuation summary (EGPm)
2017e 2018e 2019e 2020e 2021e 2022e 2023e
EBIT 646 972 1,469 1,786 2,174 2,633 2,765
Taxes (145) (219) (330) (402) (489) (592) (622)
NOPLAT 501 753 1,138 1,384 1,685 2,041 2,143
D&A 264 283 308 332 357 381 400
Gross cash flow 765 1,037 1,446 1,716 2,041 2,422 2,543
Change in working capital 30 (183) (229) (236) (232) (264) (93)
CAPEX (271) (400) (403) (400) (402) (402) (422)
Free cash flows (FCFs) 524 454 814 1,080 1,407 1,756 2,028
WACC 16.7%
Present value of FCFs 4,261
Present value of terminal value 8,426
12‐month enterprise value 12,687
2018e net debt (1,683)
2018e investments 3
12‐month equity value 11,007
Number of shares (m) 941
Mark value (EGP/share) 11.7
2017e DPS, net of tax 0.1
12‐month target price (EGP/share) 11.8
Total potential return (%) 30.6
Source: HC
14
Egypt dairy sector
Consumer | Egypt
31 October 2017
Domty DCF valuation summary (EGPm)
2017e 2018e 2019e 2020e 2021e 2022e 2023e
EBIT 129 384 501 562 633 714 750
Taxes (35) (87) (113) (127) (142) (161) (169)
NOPLAT 95 298 388 436 490 553 581
D&A 50 58 67 76 86 97 102
Gross cash flow 145 356 455 512 577 650 683
Change in working capital (223) (174) (142) (190) (124) (153) (63)
CAPEX (161) (104) (94) (72) (89) (99) (104)
Free cash flows (FCFs) (239) 78 220 250 364 399 516
WACC 15.0%
Present value of FCFs 1,104
Present value of terminal value 2,689
12‐month enterprise value 3,793
2018e net debt (742)
2018e minority interest 0
12‐month equity value 3,051
Number of shares (m) 283
Mark value (EGP/share) 10.8
2017e DPS, net of tax 0.0
12‐month target price (EGP/share) 10.8
Total potential return (%) 19.8
Source: HC
15
Egypt dairy sector
Consumer | Egypt
31 October 2017
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IMPORTANT DISCLOSURES
Analyst certification:
I, Noha Baraka, CFA, certify that the views expressed in this document accurately reflect my personal views about the subject securities and companies. I also
certify that I do not hold a beneficial interest in the securities traded.
Analyst disclosures:
The analyst or a member of the analyst’s household does not have a financial interest in the securities of the subject company (including, without
limitation, any option, right, warrant, future, long or short position).
The analyst or a member of the analyst’s household does not serve as an officer, director, or advisory board member of the subject company.
The analyst’s compensation is not based upon HC’s investment banking revenue and is also not from the subject company in the past 12 months.
16
Egypt dairy sector
Consumer | Egypt
31 October 2017
HC disclosures:
Company name: Juhayna Food Industries Disclosure: None
Company name: Arabian Food Industries (Domty) Disclosure: None
1. HC or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company.
2. HC or its affiliates have managed or co‐managed a public offering of securities for the subject company in the past 12 months.
3. HC or its affiliates have received compensation for investment banking services from the subject company in the past 12 months.
4. HC or its affiliates expect to receive or intend to seek compensation for investment banking services from the subject company in the next 3
months.
5. HC has received compensation for products or services other than investment banking services from the subject company in the past 12 months.
6. The subject company currently is, or during the 12‐month period preceding the date of distribution of this research report was, a client of HC.
7. HC makes a market in the subject company’s securities at the time this report was published.
The HC rating system consists of 3 separate ratings: Overweight, Neutral, and Underweight.
The appropriate rating is determined based on the estimated total return of the stock over a forward 12‐month period, including both share appreciation
and anticipated dividends.
Overweight rated stocks include a published 12‐month target price. The target price represents the analysts’ best estimate of the market price in a 12‐
month period. HC cautions that target prices are based on assumptions related to the company, industry, and investor climate. As such, target prices
remain highly subjective.
The definition of each rating is as follows:
Overweight (OW): Estimated total potential return greater than or equal to 20%
Neutral (N): Estimated total potential return greater than or equal to 0% and less than 20%
Underweight (UW): Estimated total potential return less than 0%
NR: Not Rated
SP: Suspended
Stocks rated Overweight are required to have a published 12‐month target price, while it is not required on stocks rated Neutral and Underweight.
Distribution of HC ratings
Rating Count Percent Percent provided investment banking services in past 12 months
Overweight (OW) 13 68.42 15.38
Neutral (N) 4 21.05 0.00
Underweight (UW) 2 10.53 0.00
17
Egypt dairy sector
Consumer | Egypt
31 October 2017
Juhayna Food Industries as of 29 October 2017 Arabian Food Industries (Domty) as of 29 October 2017
14 12
12 10
10
8
8
6
6
4
4
2 2
0 0
Date Recommendation Target price Date Recommendation Target price
11 Feb 2014 Neutral EGP11.6 22 Aug 2016 Overweight EGP8.7
14 Sep 2014 Neutral EGP10.5 4 Dec 2016 Neutral EGP8.5
1 Feb 2015 Neutral EGP10.9 31 Oct 2017 Overweight EGP10.8
12 Oct 2015 Overweight EGP10.0
25 May 2016 Neutral EGP7.4
4 Dec 2016 Underweight EGP5.6
31 Oct 2017 Overweight EGP11.8
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Although the statements of fact in this report have been obtained from and are based upon recognized statistical services, issuer reports or
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Additional information available upon request.
18