Beltone has upgraded their fair value (FV) per share estimate for Domty by 14% to EGP 14.80 and maintained their buy rating with an upside of 34%, according to a research note released on Wednesday. "Our upgrade reflects management's new drive to diversify, with the firm's medium-term strategy entailing a transformation into an equal producer of staples (in the form of white cheese and potentially flavoured milk in the future) and high-growth segments (baked goods and juice). We believe a more conservative non-cheese revenue contribution of 38% by 2023 is achievable," said the note. Beltone estimate that non-cheese revenue to grow by 61%, with Domty's cheese sandwich revenues expected to double, due to the surprise price hike executed in the first quarter (Q1) of 2019 (factory price increased from EGP 2.5 to EGP 3.5). According to the note, Domty is still operating at full sandwich capacity with negligible product returns, despite significant price increase, raised capacity by 30%, and offering minimal-to-no trade incentives. "We factor in two additional sandwich production lines (400k pieces/day each, one of which is already contracted in 2019) and assume a revenue contribution of 25% by 2023e, driven by capacity ramp-up with average price growth maintained at c5%/annum beyond 2019e. We also revise our juice estimates upwards by 21% on stronger projected volumes supported by: i) the planned revamp in June; and ii) the improving distribution and brand image borrowing from the sandwich's success, given that both segments share a fleet and target the same audience," the note added. Moreover, Beltone cut their revenue estimates for the core segment (80% of 2018 revenues) by 5% as Q4 of 2018 and management guidance for Q1 of 2019 imply an even-weaker than previously expected outlook. Yet, higher estimated non-cheese revenue (+61%) and a more-profitable top line sales mix buoy our gross profit estimates and push our gross processing margin to an average of 26% throughout our forecast horizon.
