June 2021

In a recent report, HC Brokerage presented their analysis of Egypt’s cheese sector and a valuation of the two players Obourland and Domty, where HC maintained Overweight rating for both on share price dip.
Demand recovery was mainly interrupted by higher prices to mitigate higher input costs
However, margins should improve in 2H21e on low-interest costs and improved working capital, allowing for good FCF generation
We reduce our 12M TP for Obourland c7% to EGP9.26/share, and for Domty c20% to EGP6.73/share while maintaining our OW rating for both on share price dip. Obourland is our sector pick

Noha Baraka, the Head of Consumers at HC commented on Egypt cheese sector: “We see Obourland offering the best exposure to the Egyptian cheese sector: In the aftermath of soaring global commodity prices and the prolonging of the COVID-19 situation, we see inflation rising, pressuring consumer’s disposable income, and weighing down on private consumption. We see private consumption growth dropping to an average of 6.15% in 2H20/21e from an average of 9.91% in 1H20/21. The elevated global commodity prices have left companies with no choice but to raise their retail prices to restore margins, which could impede the volume growth of certain players, in our view. Companies fared differently within the cheese market depending on their pricing strategies, and the varying degrees of their exposure to the crisis. Given that Domty started the year with a more aggressive pricing strategy than Obourland, and the situation worsened with the phasing out of agents, we accordingly expect its cheese volumes to drop c8% y-o-y in 2021e. As for Obourland, we forecast volumes to remain essentially unchanged y-o-y in 2021e, supported by its active procurement strategy allowing it to adopt gradual price increases and maintaining its presence in underserved areas characterized by lower competition.”

“Despite an unfavorable cost outlook, we still see the possibility of margin expansion for both companies toward 2H21e: The COVID-19 outbreak disrupted the global commodities markets in 2021. The average winning contract price of skimmed milk powder from New Zealand rose c15% y-t-d and c25% y-o-y, with future contracts suggesting that prices will continue rising for the rest of the year, implying an increase of c3% h-o-h in 2H21e and c25% y-o-y higher. Also, palm oil prices increased c57% y-t-d due to labor shortages in major producing countries following the COVID-19 outbreak, with future contracts suggest that palm oil prices are expected to drop c7% h-o-h in 2H21e but still increase c44% y-o-y. Starting with Obourland, we see that its real strength lies in running a solid business model, safeguarding it during the recent hike in commodity prices. Obourland adopts successful cost management initiatives, an active procurement strategy, raised efficiencies, and is dependent mainly on wholesalers, all together are paying off and allowing the company to maintain high margins for the rest of the year, in our view. As for Domty, we expect the relative easing of the commodity wave cycle, the completion of the phasing out of agents, improved cost management, and increased contribution from the higher-margin bakery segment to bode well for its margins in 2H21e. Nevertheless, we see that cost overruns stemming from high marketing expenses for both companies related to new launches and improved distribution channels accelerate SG&A spending and lead to some return dilution. The cost overrun should leave our Obourland terminal EBITDA margin at 15.9%, 1.3 pp lower than in 2020, and Domty at 9.0%, 1.4 pp lower than 2020. However, we are not concerned, as both companies should enjoy a healthy cash conversion cycle (CCC) due to their increased reliance on wholesalers’ distribution channels, which should translate to good FCF generation, not fully priced in by the market. As a result, Obourland offers an average FCF yield of c14% and Domty c12% over our forecast period.” Baraka added.

“Maintain Overweight for both; we favor Obourland: We differentiate between stocks based on their demand recovery, pricing strategy, balance sheet strength, and the healthiness of their cash flow cycle. For dairy names, we have lowered our valuations on lower-than-expected demand recovery in the cheese segment and rising costs with unmatched price increases, despite a lower cost of capital. As a result, we reduce our 12-month target price for Obourland c7% to EGP9.26/share and maintain an Overweight rating. Obourland offers a compelling valuation, despite its outperforming the market by c21% since the beginning of the year. For Domty, we reduce our 12-month target price c20% to EGP6.73/share and maintain our Overweight rating, with the stock underperforming the market by c12% over the same period. Historically, Obourland has proved its resilience given its defensive nature, fairly weathering stock market shocks, and outperforming during stock market recovery times. With both companies having solid fundamentals and compelling valuations, we favour Obourland, especially when the stock market lacks triggers.” Baraka Concluded.

trading.

HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled June 17^th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “The May inflation figures came in slightly better than our estimates of 5.0% y-o-y and 0.8% m-o-m. Over the rest of 2021, we expect monthly inflation to average 0.8% m-o-m and 6.8% y-o-y accounting for rising international commodity prices and a possible pick-up in tourism and consumer spending following the successful rollout of the COVID-19 vaccine. We, therefore, expect 2021 inflation to remain within the CBE’s target range of 7% (+/-2%) for 4Q22. Given sluggish tourism receipts, currently, Egypt relies on foreign portfolio inflows into sovereign debt as a main source for foreign currency which poses interest rate pressures on sovereigns. This is evident in T-bill rates declining by only 129bps since January 2020 despite the CBE undertaking a 400 bps rate cut during that period which resulted in a decoupling between corridor rates and sovereign yields. Currently, banks earn an after-tax rate of 10.6% on 12M treasuries and around 10.8% on lending to the private sector (according to the CBE’s subsidized loan initiatives to different sectors at 8% while compensating participating banks for the difference between mid-corridor rate + 2%). We believe that at this point a rate cut could result in further deviation of sovereign and corridor rates with the risk-free rate being on the lower side. We note that over the last 3 months foreign portfolio inflows into Egyptian treasuries have been largely stagnant with announcements for foreign holdings in May being at USD28-29bn, the same figure that was announced for February. We also note that net foreign assets for the banking sector (excluding the CBE) came in at USD3.52bn which we believe is a vulnerable level given that Egyptian banks are the main cushion against a currency sell-off. We accordingly, expect the MPC to maintain rates unchanged in its upcoming meeting. We believe that a 100 bps rate cut is possible in 2H21 following the resumption in tourism and a possible pick-up in international trade. Also, possible higher inflows into Egyptian sovereigns following the inclusion in the FTSE Frontier Emerging Markets Government Bond Index Series and the JP Morgan GBI-EM Global Diversified Index could allow room for the MPC to undertake a rate cut. That said, we believe that Egyptian treasuries provide attractive real yield of 4.0% on our calculations (13.3% on 12M T-bills, 15% tax rate for European and American investors and our inflation estimate of 7.3%) compared to a real yield of 3.1% for Turkey (18.7% on 1-year treasuries, zero tax rate and Bloomberg inflation estimate of 15.6%).”

It is worth mentioning that, in its last meeting on 28 April, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the fourth consecutive time after undertaking cuts of 50 bps twice in its October and November 2020 meetings. Egypt’s annual headline inflation accelerated to 4.8% in May, with monthly inflation increasing 0.7% m-o-m compared to an increase of 0.9% in April, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Month: June 2021

Egypt cheese sector: Demand recovery interrupted

In a recent report, HC Brokerage presented their analysis of Egypt’s cheese sector and a valuation of the two players Obourland and Domty, where HC maintained Overweight rating for both on share price dip.

HC: Possible higher inflows into Egyptian sovereigns following the inclusion in the FTSE and the JP Morgan GBI-EM

HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled June 17^th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

In a recent report, HC Brokerage presented their analysis of Egypt’s cheese sector and a valuation of the two players Obourland and Domty, where HC maintained Overweight rating for both on share price dip.

HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled June 17th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled June 17^th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.