Egypt's consumer sector to fully recover by early 2019 as inflationary pressures ease

Market indicators suggest there was broad-based market slowdown in 2017

A recent report issued by HC Brokerage suggests that Egypt's consumer sector should be fully recovered by early 2019, with inflationary pressures expected to ease.
The research company raised Juhayna's 12-month target price circa 36% to EGP 16.1 per share.
For Domty, it raised the 12-month target price around 29% to EGP 13.9 per share and therefore maintained its oeverweight rating for both companies.
Noha Baraka, an equity analyst in the consumers sector at HC Brokerage, stated that market indicators suggest there was a broad-based market slowdown in 2017 that was more aggressive than initially anticipated.
According to the report, the aggressive price hike environment posed a drag on volumes, which indicates that demand was more elastic to price increases.
"Although we expect to see an improvement throughout 2018, as already evident by Juhayna and Domty's Q1 2018 results, the expected inflationary pressures stemming from another round of subsidy cuts in July will likely further weigh on private consumption," the report said.
"In our view, our new estimates point to volumes being fully restored by early 2019, later than our previous H2 2018 forecast, as inflation moderates to an average 12.8% from an expected 15.0% this year on the upcoming round of economic reform measures and the fuel and electricity subsidy adjustments," it continued.
The report still expects Domty to stand a better chance than Juhayna in terms of volume recovery despite fierce competition in part due to its cheese products, which are low-cost and relatively high-protein.
This is in addition to the company ramping up utilisation rates of its Domty Plus brand, which saw great acceptance from customers and has secured bulk sales to one of its big clients, Baraka added.
Over the short term, the report expects Domty's margins to recover faster than Juhayna's on a more favourable skimmed milk powder cost outlook, which is a key pillar for margin expansion.
"This, along with the company's efforts to fully restore its raw milk price discount advantage, should accelerate margin recovery. Our numbers point to a circa 14% y-o-y drop in the blended milk cost in 2018. Notwithstanding this, the aggressive pricing strategy in 2017 allowed Domty to withstand a circa 13% higher EGP/USD rate, further supporting our estimates of a 5.6 pp margin expansion in 2018," the report added.
As for Juhayna, the report estimates its blended milk cost will grow around 15% y-o-y in 2018 on a less favourable milk cost outlook, reflecting a higher EGP/USD rate given the depletion of the whole powdered milk inventory it had procured earlier at low prices.
However, this is expected to be largely offset by the price increases the company is planning to adopt throughout the year, thus implying a 1.3 pp increase in 2018 margins. Both companies' ongoing cost efficiencies, by localising a big portion of their raw materials, continued sales' mix shifts toward higher margin products, constant portfolio optimisation, and boosting retail sales should also support restoring margins back to historical levels, Baraka said.
"We also adopt a blended moving WACC to account for potential interest rate cuts, which translates to a lower average cost of capital than we previously used. We continue to add a one‐year semi‐explicit period to our forecasts to account for the lower growth in perpetuity, which has a significant impact on our FCF calculation for the terminal year," the report stated.
The report raised Juhayna's 12-month target price circa 36% to EGP 16.1 per share with a new target price that implies a 2019 P/E multiple of 16.0x and EV/EBITDA multiple of 9.6x and offering a potential return of around 28% over the 4 June closing price of EGP 12.5 per share.
"We therefore maintain our overweight rating. In our view, the current valuation is compelling, with the stock trading at a circa 62% discount to its peers' implied 2019 EV/EBITDA multiple of 19.0x," the report added.
For Domty, the report raised the 12-month target price around 29% to EGP 13.9 per share.
"Our new target price implies a 2019 P/E multiple of 10.5x and EV/EBITDA multiple of 8.1x and offers a potential return of circa 27% over the 4 June closing price of EGP 10.9 per share. We therefore maintain our overweight rating. The stock is trading at a circa 60% discount to its peers' implied 2019 EV/EBITDA multiple of 16.2x," the report explained.
Finally, Baraka said that Juhayna remains HC Brokerage's top pick within the dairy sector on a stronger balance sheet, a healthier cash flow cycle translating to higher FCF yields, and a higher potential return.