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Juhayna stock still attractive for investors despite earnings cut: report
Demand growth to be muted in short term on continuation of economic reforms
Published in Daily News Egypt on 20 - 01 - 2019

A recent report issued by HC Securities said that the Juhayna stock is expected to remain attractive for investors despite an earnings cut.
The report noted that in spite of the latest fiscal consolidation, soaring inflation, a delayed monetary easing cycle, and lagging wage increases, Juhayna has proven to be the most resilient to price increases among consumer sector companies.
"This was evident, in our view, with total volumes growing c14% year-over-year (y-o-y) in the first nine months of 2018 (9M18), broadly in line with our previous estimate. We expect total volume growth, however, to be largely muted at only c6% y-o-y in 2019e, standing at about 517,000 tonnes, falling short of our previous estimate by c11% on the expected rise in inflationary pressures resulting from the energy price hikes slated for June 2019e," the report noted.
It added that this will be associated with increased price levels, which is expected to be limited to a maximum c5% given the nature of the company's products.
"We believe this will be further exacerbated by the continuation of the slow conversion from loose to packed milk and yogurt products. That said, we expect full volume recovery toward the end of 2019e, later than our previous first half (H1) of 2019e forecast. Longer term, we expect prices to largely stabilise, stimulating demand, filtering through to a 3-year total volume compound annual growth rate (CAGR) of c12%, c16% lower than our previous estimate mainly due to base effect," the report explained.
"Our EGP/USD rate is now c19% higher, on average, over our forecast period, wiping out the favourable milk cost outlook as suggested by future contracts, leaving our 2019–23e blended milk cost c8% higher. However, for us, this is not a concern given the company's ability to push for price increases as well as its ongoing efforts to restructure its overheads." It added.
The report expected Juhayna to continue to reap the benefits of the volume recovery and economies of scale.
"Our new estimates still imply a 5-year earnings before interest, tax, depreciation and amortization (EBITDA) CAGR of c23%, leaving our terminal margin at 19.6%, 0.9 pp higher than our previous estimate. Nevertheless, the delay in interest rate cuts has more than offset the benefits resulting from company's deleveraging strategy, filtering through to higher net financing costs, which, in addition to our updated estimates, leave our 2019–23e EPS estimates c26% lower, on average."
The report cut HC 12‐month target price c13% to EGP14.0 per share on the back of our new estimates and higher average cost of capital of 17.5%, from 16.0% previously, despite rolling over their forecast period by 1 year.
"Our new target price implies a 2019e price earnings ratio (P/E ) multiple of 21.3x and Enterprise value (EV)/EBITDA multiple of 10.2x, and offers a potential return of c22% over the 10 January closing price of EGP 11.5 per share. We therefore maintain our Overweight rating. In our view, current valuation is compelling, with the stock trading at a 2019e EV/EBITDA multiple of 8.6x, which is a c39% discount to its MEA peers implied multiple of 14.2x. The stock is also trading at a 2019e P/E multiple of 17.4x, which is a c9% discount to its MEA peers implied multiple of 19.2x." the report concluded.
Meanwhile, Pharos Research has slashed its fair value (FV) of Orascom Investment Holding's (OIH) stock by 29.8% to EGP 0.66 from EGP 0.94.
The stock's lower evaluation was ascribed to the sale of MENA Cables, lack of value-accretive investments, valuing OIH's stake in Beltone Financial Holding at book value (BV) rather than at the independent financial adviser (IFA) fair value (FV) of EGP 9.30 per share, which was based on profitability targets that did not materialise, the Cairo-based firm said in a research note.
Pharos noted that its evaluation of OIH's stock was also based on the extension of the Pakistan Cables which exhausted around EGP 800m of cash, along with adding OIH's 30% stake in Sarwa Capital Holding for Financial Investments at EGP 10.0 a share, using a simplified discounted cash flow (DCF) model.
OIH's acquisition of a stake in Sarwa Capital was "on time", Pharos said, adding that OIH's stock price performance still awaits a clear strategic direction, or "value-accretive" acquisitions.
Due to owning 30% in Sarwa, the deal will be a key value driver for OIH, controlled by the Egyptian giant owned by billionaire Sawiris, on both the valuation and profitability levels, the research firm highlighted. Pharos highlighted that "SARWA contributes to c.63% of OIH's FV".
"Despite OIH's BoD approval to acquire Nile Sugar, we believe that OIH should not conclude that transaction, since Nile Sugar is a personal investment of the Sawiris family which creates a conflict of interest," Pharos explained.
During 9M18, Orascom Investment posted a 346% y-o-y hike in consolidated profits, registering EGP 1.07bn, versus EGP 239.9m.
In another research note, Pharos Research has set the FV of 10 banks listed in the EGX.
The FV of Commercial International Bank (CIB) was set at EGP 90 per share, with Equal Weight recommendation, according to Pharos' research note.
Pharos Research maintained the FV of Qatar National Bank Al Ahli (QNBA), Credit Agricole – Egypt, and Abu Dhabi Islamic Bank – Egypt at EGP 50.4, EGP 55, and EGP 15.1, respectively, recommending the increasing of their weight.
Meanwhile, the weight of Suez Canal Bank (SCB) was reduced, with EGP 7 FV, Pharos revealed.
Another research note issued by Beltone said that a group of eight companies are expected to be removed from the EGX's benchmark EGX30 index for not meeting the trading value and cash outflows requirements.
The companies expected to leave the EGX30 include Abu Qir Fertilisers, Sidi Kerir Petrochemicals, and Orascom Construction.
On the other hand, Beltone forecast that Credit Agricole-Egypt, MM Group for Industry And International Trade, Oriental Weavers Carpet, and Cairo Investment and Real Estate Development, among others, would join the benchmark index.
The EGX will announce the results of its biannual review in February.

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