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Securities & Investment

Month: April 2021

HC: Edita Food Industries, undemanding valuation

Posted on by Marwa Nakhla

  • In a recent report, HC Brokerage presented their analysis of the food & beverage sector in Egypt where they shed the light on Edita Food Industries’ performance and maintained their OW rating on compelling valuation.

  • Consumption recovery is behind us; however, the 14% VAT imposition may drag volumes; we estimate a 2020–25e volume and revenue CAGR of c10% and c14%, respectively
  • Improved sales mix, along with indirect price increases, should mitigate higher costs, translating to a 2020–25e EPS CAGR of c18%
  • We reduce our 12M target price c18% to EGP12.0/share on lower estimates but maintain our OW rating on compelling valuation

Noha Baraka, the Head of Consumers at HC commented that: “Inevitable volume recovery, in our view, yet the potential imposition of a 14% VAT remains a risk: We see a good year ahead for the snack-food market, with inevitable private consumption recovery, in our view, backed by easing inflationary pressures, stable FX rates, and a low-interest-rate environment. If it were not for the possible imposition of a 14% value-added tax (VAT) (instead of 5% currently) on snack food goods, including bakery, we would have been more optimistic about a surge in demand. This surge would have been backed by the Egyptian government’s eased COVID-19 precautionary measures allowing more on-the-go consumption of snacks, not to mention the change in consumer behaviour, tilting more towards products offering more value for money, despite higher price points. However, we opt to be conservative in our volume estimates for the time being as we believe direct price increases following the VAT imposition could initially cause a demand shock, especially in light of tamed inflation rates. Accordingly, we expect total volume to rise c9% y-o-y in 2021e to 104,800 tons, almost unchanged compared to our previous estimate. Longer-term, we expect inflation to average c9% and private consumption to increase and normalize at 5% from an estimated 1.0% only in FY20/21, further supporting our assertion of an acceleration in the pace of volume recovery. Accordingly, we look for a 2022e–25e total volume CAGR of c11%, on average. We expect the croissants and wafer segments to stand out the most given new product launches, not to mention the inauguration of the biscuit segment and potentially rolling out of new SKUs, and the materialization of the company’s Moroccan JV to all help accelerate demand recovery.”

“We expect high margins to sustain over our forecast period, despite an unfavourable cost outlook: Despite the significant surge in most of the input costs, rising almost c18% y-t-d (except for sugar and cocoa, which remained essentially unchanged y-t-d, yet still increased c31% y-o-y), and higher cost base to support new ventures, we believe a more robust EGP/USD rate and higher volumes should primarily mitigate this. Therefore, we expect the 2021e EBITDA margin to expand 1.4 pp y-o-y to 17.1%. Going into 2022e we expect margins to continue expanding mainly on: (1) Edita’s continued efforts to re-engineer its portfolio and introduce to the market new offerings at higher price points, 2) venturing into new segments, 3) and ramping up of utilization rates. Thus, our numbers point to a terminal EBITDA margin of 17.6% by 2025e.  We are optimistic about the company’s management initiatives over the past year to increase its debt level in EGP terms, which we expect would expedite Edita’s earnings recovery and enhance returns. We forecast 2020–25e EPS to increase at a CAGR of c18%, on average, which leaves our ROE at 27.3% by 2025e from 17.2% in 2020, further solidifying our view of improving profitability.” Baraka added.

“ We reduce our 12-month target price by c18% and maintain an Overweight rating on further share price dip: We reduce our 12-month target price by c18% to EGP12.0/share on our new lower estimates across the board. Our new target price implies a 2022e P/E multiple of 19.1x and EV/EBITDA multiple of 9.5x, offering a potential return of c58% over the 22 April closing price of EGP7.75/share. Therefore, we maintain our Overweight rating. In our view, the current valuation is highly compelling, with the stock trading at a 2022e P/E multiple of 12.3x, which is a c49% discount to its peers’ implied multiple of 24.2x. The stock is also trading at a 2022e EV/EBITDA multiple of 6.1x, a c61% discount to its peers implied multiple of 15.5x. We believe the market is overstating VAT-associated risks and over penalizing the stock, which is unjustified in our view in light of its good operational recovery. We see Edita as too cheap to ignore in a sector characterized with high trading multiples nature, suggesting potential share price correction from current levels.” Baraka Concluded.

HC: March inflation figures came in slightly higher than our estimates. We expect the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled April 29th 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: “March inflation figures came in slightly higher than our estimates of 4.4% y-o-y and 0.5% m-o-m, which we believe reflects a correction from the previous suppressed levels. Over the rest of 2021, we expect monthly inflation to average 0.9% m-o-m and 6.7% y-o-y accounting for rising international commodity prices and a possible pick-up in economic activity 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. Looking at the results of recent government T-bill auctions, we believe that foreign portfolio inflows are gradually regaining momentum as evident in the high coverage and possibly the beginning of a cool-off in yields from accelerated increases witnessed over the last couple of months. In recent auctions, yields on US 10-year T-bonds declined to 1.57% from a high of 1.73% in the beginning of April, which we believe reflected positively on foreign portfolio inflows in Egypt. However, we expect to see upward pressure on US treasury yields with Bloomberg 2021 consensus inflation forecast for the US at 2.6%. Also, monetary tightening in other emerging markets, such as Turkey poses upward pressure on Egypt’s yields. Currently, Turkey offers a yield of 17.2% on 19M treasuries, resulting in a real yield of c4%, on our calculations, given zero taxes and Bloomberg consensus inflation estimate for Turkey at 13.2% over the period. This compares to a real yield of 3.9% on Egypt’s 12M T-bills, on our numbers, given 15% tax rate for US and European investors and our inflation forecast of 7.5% over the next 12 months. That said, we expect the MPC to maintain rates unchanged in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 18 March, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the third consecutive time after undertaking cuts of 50 bps twice in its September and October 2020 meetings. Egypt’s annual headline inflation remained unchanged at 4.5% in March, with monthly inflation increasing 0.6% m-o-m compared to an increase of 0.2% in February, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

How Investor Trends and Behavior Have Permanently Changed Post Pandemic

Posted on by Marwa Nakhla

  • Everyone from small to medium and even enterprise-level organizations have changed forever. The pandemic currently facing the globe has brought a special set of circumstances that have permanently altered the way investors make decisions. This article is all about how investor trends and behavior will shift post-pandemic. Before we dive into some of those new trends, let’s take a look at a few economic sectors that are currently on the rise and which sectors are on the decline.

 

Post-Pandemic Economic Sectors You Want to Pay Attention to

Quaternary activities fall under what’s known as the knowledge sector of the economy. In both emerging markets as well as developed nations, quaternary activities show great potential from an investor’s perspective. Accounting and brokerage firms, mutual fund managers, tax consultants, software developers, statisticians, business intelligence firms, and cybersecurity agencies all have something in common. They are decentralized in nature.

These quaternary activities in the knowledge sector show strong opportunity for investors because they have the ability to be decentralized. Not being connected to any one single economy, location, or governmental organization means they can operate independently. That is a huge advantage and one trend among investors as we head into 2021.

Not All Economic Sectors Are Equal

Unlike quaternary activities in the knowledge sector, investor trends show diminished interest in tertiary activities. However, not all tertiary activities show a decrease in revenue earning potential. More specifically, the retail industry that is composed of retail consumer spending and restaurateurs are particularly vulnerable. Therefore, post-pandemic investing will undoubtedly show a bearish trend in these areas.

New Trends in The 2021 Landscape

Our world is rapidly changing. Certain trends that have emerged at the end of 2020 have now solidified themselves at the beginning of 2021. Let’s take a look at three of the most impactful trends in the business environment changing our world.

 

An Emphasis on Remote Operations

As businesses attempt to adapt to a post-pandemic landscape, more and more companies are embracing remote operations. Whether it’s software development, project management, ERP, business intelligence, business development, or anything else, innovative tech allows it to be completed over a remote platform. This includes companies that provide services like telehealth, online meeting platforms, remote sales team building software, and even dating apps. The future is becoming increasingly virtual.

Business Intelligence Becomes Mainstream

Interpreting big data and using that information to arrive at data-driven decisions is not a new industry. However, our post-pandemic landscape is putting a new emphasis on services like Microsoft’s Power BI and business intelligence firms that help interpret big data and convert that raw information into useful formats. Everyone from investors to sales managers utilizes business Intelligence platforms to make more informed, and educated decisions backed by the data.

Finance Becomes Decentralized

Fintech services and cryptocurrencies have shown a trend of becoming increasingly decentralized. Businesses no longer have to rely on central banks and government financing. Investors and other businesses have alternatives that come in the form of decentralized fintech providers, innovative online lenders, trading platforms, and brokerages that leverage a decentralized business model. This is a trend becoming more popular by the day.

Specific Industries You Want to Be A Part of Post Pandemic

A little bit earlier we discussed economic sectors already showing huge potential as we move into a post-pandemic landscape. However, let’s dive a little bit deeper to discuss specific industries within those sectors where investing trends and behaviors show great promise.

CyberSecurity

Now is as good as time as any to hop onto the cybersecurity wave sweeping through the globe. As an investor, entrepreneur, equities broker, or anyone else searching for booming industries, you should be aware of a few things. Cybersecurity is a large industry. Diving into the specifics reveals that the areas of authentication, cloud data protection, and application monitoring are the most lucrative niches within the market.

Education & E-Learning

With brick and mortar schools physically shut down due to pandemic precautions, virtual education and the E-learning industry is on the boom. Countries like China are at the forefront of developing large & powerful enterprise-level organizations focusing on virtual education and E-learning platforms based 100% online.

Global Logistics

International shipping is the lifeblood of every economy. As goods are manufactured around the globe and shipped out across the ocean, fortunes are made and empires are built. It’s been that way for thousands of years. You could say that the global logistics trade is both recession & pandemic proof. The industry never sleeps and investors can count on the ships moving so long as there is oil to fuel them.

The Future Is Largely Unwritten

This article has given you a detailed snapshot of what industries are booming and which economic sectors are most vulnerable. While investor trends and behaviors can leverage that information, the future is largely unwritten. While we may know what a post-pandemic business environment will look like, only time will tell how that directly impacts the free market.