New venture to bode well for Domty margins in 2019/23e: HC Securities

The company is expected to add 11% gross profit estimates in the five-year period

A recent report issued by HC Securities and Investment said that Domty's new venture will bode well for its margins estimates in 2019/23.
"Diversification largely offsets rising inflationary pressures, leaving our 2019/23 revenue estimates 3% higher, on average. Higher prices continue to support Domty's margins, allowing them to revert to historical averages post 2019e, but a higher EGP/Dollar cuts our 2019/23e gross profit margins by 1.1 pp, on average," the report said.
The report noted that the volumes to remain largely intact in the fourth quarter 4Q of 2018e before growing at a 4-year Compound annual growth rate (CAGR) of 14%.
"In our previous dairy sector note, we argued that private consumption would be disadvantaged following the July energy price hike, driving inflationary pressures higher, weighing down on consumer disposable income, and suggesting an unfavorable backdrop for demand in the short term."
The report noted that Domty Sandwich to add 11% to the company's 2019/23 gross profit estimates.
Last September, Domty started to distribute its new branded-product, Domty Sandwich, with various flavors, which saw a great market acceptance and reached the line's maximum capacity utilisation (220,000 pack/day) in the first six weeks.
Since then, the company has decided to extend its existing line capacity by almost 35% to 280,000 packs/day, which is expected to be operational next February with a fully paid investment cost of $500,000.
Last week, Domty signed another agreement with AMF, a leading US manufacturer of high-speed bakery equipment, to acquire and install a new bakery line with a production capacity of 400,000 packs/day to nearly double the current capacity of its existing line when it comes online in September 2019.
The investment cost of the new line is $4m, which will be self-financed as well as from its initial public offering (IPO) proceeds. Until the new line comes on stream.
"We opt to be conservative and expect the new venture to generate some EGP 372m in revenue by 2020e, if the existing line will continue to operate at its maximum capacity, while the new line will operate at an average capacity of 60%. Our estimate falls 38% short of the management target," the report added.
The report expected the product's volumes to grow at a 2019–23e CAGR of 21%, if Domty sells the products at EGP 2.45/pack – EGP 2.65/pack, which should filter through to a 4-year revenue CAGR of 23%.
Egypt's fiscal debt is expected to ease to 6.4% of gross domestic product (GDP) by fiscal year (FY) 2019/20, down from 9.4% in FY 2017/18, Fitch Solutions Macro Research, a subsidiary of Fitch Ratings Inc., said in a report.
"The North African nation's fiscal debt is likely to narrow to 7.8% during the current fiscal year on the back of robust economic growth and fiscal reforms," the report added.
A targeted increase in tax revenues and inflows from the gas sector, along with the government's continued subsidy cuts, will help raise general revenues, in line with cutting spending, according to the research unit of Fitch Group.
Egypt' public debt-to-GDP ratio is projected to slump to 78.6% in the next fiscal year, compared to 84.3% of GDP this fiscal year, the report added.
Fitch pointed out that the Arab world's most populous country's general debt composition and maturity of short-term loans represent the biggest risk to Egypt's fiscal consolidation.
"Egypt's debt maturity schedule is relatively short, heightening rollover risks. Indeed, 50.0% of the debt is set to mature by end-2020 and in an environment of tightening global financing conditions, this could leave the country more exposed to a jump in borrowing costs," the firm said.
"Nevertheless, our core view remains for continued fiscal reforms and resultant positive investor sentiment to suppress such costs to some extent, helping to keep debt service broadly manageable for the government," it added.
Another research note issued by Capital Economics expects inflation to fall further in Egypt over the coming months as the effects of the food price spike continue to unwind and underlying inflation stays weak.
The London-based research firm maintains its long-held view that Egyptian inflation will ultimately fall by more than most anticipate over the next two years.
Egyptian inflation dropped back in November and it is expected to fall further over the coming months.
The Central Bank of Egypt (CBE) is likely to keep interest rates unchanged at its meeting later this month but will resume its easing cycle in early 2019.