Pharos Research expects consumer purchasing power to recover after the recent deceleration in inflation, EGP against USD appreciation, falling interest rates, and the completion of the subsidy phase-out programme, the research firm said in a Monday report. As a result, the F&B sector would be among the first sectors to benefit from a steady economic recovery beyond 2019, the report added. Despite improving macro conditions and consumer spending behaviour, Pharos expects muted growth in Juhayna, Domty and Obour Land companies' core product offerings caused by existing market maturity in their respective segments. Hence, Juhayna, Domty and Obour Land are creating new growth opportunities through expanding their portfolios beyond their core offerings to improve overall margins. The report cites three main reasons, namely that new investments took place in the fiscal year 2019 (FY19), improving distribution channels to increase outreach and maintain volumes, and marketing promotions to improve market share. "We believe the F&B sector's main growth pillar is expanding the companies' portfolios with ‘high-margin' products that could shield overall margins and improve profitability," the report said. Pharos Research updates the discounted cash flow valuation for their F&B coverage after incorporating new products, revising estimates and rolling over our forecast period by one year. Pharos added that "We believe F&B companies' performance was lower than expected during FY19, dragged by tight competition, fiscal consolidation, lower purchasing power, and high raw material cost. Accordingly, we cut our forecasts on all consumer stocks on weak 2019 volumes and profitability. In light of this, we downgraded our fair value for JUFO, DOMT, and OLFI to EGP11.02/share, EGP10.00/share, and EGP7.25/share respectively, with an overweight recommendation due to recent share price slumps." Regarding Juhayna, Egypt's dairy market is characterised by low per capita consumption and low conversion rates from loose to packaged milk (49% in 2018), leading to sufficient room for ramp-up sales volumes going forward. While milk is more resilient to consumption volatility, yoghurt and juice have a more elastic demand that should recover with improved economic wellbeing and higher purchasing power. The year 2019 was particularly tough as Juhayna's muted sales volume growth reflected the overall pressure witnessed in the F&B sector. However, the report indicates that Juhayna has positioned itself to benefit the most from the expected recovery in food expenditure driven by their sustained leadership position and strong brand equity across all three segments, adaptive product portfolio catering to both premium and mass consumption, and flexible pricing policy to allow for the pass-through of expected exchange-rate weakness or rising raw material costs. The factoring of steady topline growth and stable margins over the forecast period has resulted in the downgrade of JUFO'S FV to EGP11.02 per share, but an overweight recommendation after the recent severe drop in the share price. Domty Cheese producers have been recording double-digit revenue growth figures on an average 25% between FY15-FY18, however the segment has matured, witnessing a slowdown in volumes during FY19 on account of market maturity owed to packaged cheese reaching 80% of total cheese market, and fierce competition; where new companies have been able to enter the market during FY18 using cheap packaging imported from China. That being said, slow volume growth of 3-5% was expected forward. Cheese producers have also been suffering from a margin squeeze caused by the recent increase in raw material costs, mainly Skimmed Milk Powder (SMP) -+21.5% year to date reaching $2,674 per tonne. However, EGP per USD appreciation partially absorbed the increase in raw material cost, saving margins from a harsher squeeze. In light of the white cheese market conditions, companies decided to branch out and enter new segments that would gradually revive growth after FY19's weak performance. Hence, DOMT and OLFI fair value to were downgraded to EGP10.00/share and EGP7.25/share respectively on lower white cheese growth rates, while maintaining an overweight recommendation for both companies, on share price slump. "We expect white cheese markets to remain stable going forward with a lower contribution to revenues for both companies (DOMT to 55% by FY24 down from 70% in FY19 and OLFI 85% by FY24 down from 95% in FY19). We also believe that the juice segment for both companies has a higher potential in exports due to the fierce competition with established brands in the local juice market," the report concluded.
