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Securities & Investment

Tag: consumers sector in Egypt

HC: Edita Food Industries, Resilient Performance

Posted on by Marwa Nakhla

  • Attractive product offerings and efficient pricing and working capital management strategies help Edita navigate challenging conditions

  • We forecast EBITDA and EPS to grow at a 2024–28e CAGR of c18% and c21%, respectively, driven by volume and price increases

In a recent report, HC Brokerage presented their evaluation of Edita Food Industries forecasting their revenue to grow.

Pakinam El-Etriby, Consumers Analyst at HC commented that: “Edita diligently navigating a double whammy: The COVID-19 pandemic outbreak and lockdowns in 2020 impacted energy, commodity supply, and prices. When economies started to open up in 2021, the limited supply caused production bottlenecks, further fueling inflation. The Russian-Ukrainian war in February 2022 exacerbated the situation, resulting in additional disruptions in global supply chains. The impact was especially notable for commodities like wheat, primarily sourced from Ukraine and Russia. By March 2022, crude oil and wheat prices reached their highest levels in three years (from 2020 to the present), standing at USD128/bbl for oil (up from an average of USD70.9/bbl in 2021 and USD89.7/bbl for the first two months of 2022) and around USD524/tons for wheat (up from an average of USD258/tons in 2021 and USD290/tons for the first two months of 2022). Furthermore, the three consecutive EGP devaluations in March 2022, October 2022, and January 2023, by a total of around 50%, further increased raw material prices for Egyptian food producers, which eventually influenced consumer spending patterns. As a result, companies hiked prices to navigate this challenging economic environment, with Edita standing out by preserving its margins while not negatively impacting the demand for its products. From 2021 through 1H23, it managed to increase its volumes by an average of c22% y-o-y per quarter and expand its market share, as smaller producers found it difficult to withstand the challenging operating environment, with some even exiting the market, allowing Edita to increase its market share. In 2022, EFID increased its revenue and net profit by c46% and 2x y-o-y, respectively, and the momentum continued into 1H23 with a c80% y-o-y growth in revenue and a c2x y-o-y hike in net profit. We expect EFID to continue passing the bulk of cost increases onto consumers, directly and indirectly, to protect its margins against higher raw material costs.”

“We forecast revenue to grow at a 2024–28e CAGR of c14% on higher volumes and prices: During 1H23, total volume increased c31% y-o-y to 1,994m packs, and blended price increased c37% y-o-y to EGP2.83/pack, leading to the c80% y-o-y revenue growth to EGP5.64bn. We expect a similar performance in 2H23, as the company capitalizes on its attractive product offerings, serving as a meal replacement, and its active pricing strategy. Therefore, we expect 2023e revenue to increase by c64% y-o-y to EGP12.6bn. Furthermore, we forecast revenue to grow at a CAGR of c14% over our 2024–28e forecast period, with volumes growing at a CAGR of c10% and average selling prices growing at a CAGR of c4%. We expect the cake and bakery segments to continue contributing more than c80% to Edita’s total revenue over our forecast period.” El-Etriby added.

“We forecast EBITDA and EPS to grow at a 2024–28e CAGR of c18% and c21%, respectively, helped by stable margins and efficient working capital management: In 2023, we expect GPM to contract by c2 pp y-o-y to c32%, impacted by higher commodity prices and a weaker EGP, with average cost/pack standing at EGP2.06/pack (up c44% y-o-y), surpassing the c40% annual increase in average selling prices of EGP3.03/pack during the year, based on our numbers. However, starting in 2024, despite the further expected EGP devaluation, we estimate GPM to gradually recover over our 2024–28e forecast period and reach 34.9% by 2028e, as we expect Edita to pass on cost increases to consumers and successfully migrate them toward higher-priced SKUs. We expect the EBITDA margin in 2023 to marginally decline to 19.0% y-o-y from 19.8% in 2022, supported by the high operating leverage and economies of scale, with SG&A and distribution costs representing c15% of total sales versus 17% in 2022, respectively. We expect Edita’s EBITDA margin to average c22% over our 2024–28e forecast period. Accordingly, we forecast EBITDA and EPS to grow at 2024–28e CAGR of c18% and c21%, respectively. Edita has always maintained an efficient working capital strategy characterized by a negative cash conversion cycle (CCC). However, during the past two years, receivable and inventory days on hand (DOH) relatively surged due to global supply chain disruptions and the EGP depreciation, with the CCC averaging c23 days and we expect it to decline to c10 days by 2028e.” Pakinam El-Etriby concluded.

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

For further information, please contact:

Research@hc-si.com

 

Eastern Company – HC revises their estimates on higher selling prices

Posted on by Marwa Nakhla

In a recent report, HC Brokerage presented their updated evaluation of Eastern Company where they upward revised their revenue estimates.

  • Higher local cigarette selling prices should support EAST’s operating margins over our FY22/23–27/28e forecast period

  • Machinery leasing income and investment income from UTC should also preserve EAST’s profitability and cash distribution capabilities 

Pakinam El-Etriby, Consumers Analyst at HC commented that: “ We upward revise our revenue estimates by c78%, with an average 16.9% y-o-y price increase over our FY22/23–27/28e forecast period: On 25 March 2023, Eastern Company’s board approved increasing the retail price of its local cigarette brands by EGP1.00–3.00/pack, following the EGP2.00/pack price increase in September 2022, to preserve its operating margins and withstand higher raw tobacco cost, translating into a c34% y-o-y increase in the FY22/23e ex-factory price to EGP5.72/pack. Furthermore, we forecast an average increase of c13% in the blended local ex-factory price over FY23/24–27/28e, from our previous estimated average increase of 3.11%, assuming that the company still operates within the EGP4.00/pack flat tax bracket as the Egyptian government did not yet announce any revision to the flat tax brackets. Moreover, EAST’s 24%-owned subsidiary United Tobacco Company (UTC) increased its ex-factory prices to an average of EGP17.2/pack from an average of EGP14.7/pack, positively contributing to EAST’s profitability. Nevertheless, we estimate FY22/23–23/24e local cigarette volumes to drop by an average of c6% y-o-y, negatively impacted by the FX shortage implications. Yet, over FY24/25–27/28e, we expect volumes to normalize and increase by an average c5% y-o-y to 71.9bn cigarettes by the end of our forecast period. Therefore, we estimate EAST’s top line to grow at a 6-year CAGR of c19% over our forecast period, translating into an upward revision of c78% in our FY22/23–27/28e total revenue estimates.”

“We upward revise our FY22/23–27/28e gross profit estimates by c95%, on average: We upward revise our FY22/23–27/28e gross profit estimates on the higher local cigarette selling prices, leaving our GPM to average c42% over our forecast period, up from a previously estimated average of c39% over the same forecast period. However, we estimate a c5 pp y-o-y drop in FY23/24e GPM to 39.9% due to a weaker EGP and inflationary pressures, inflating EAST’s imported raw material costs. Moreover, May’s average tobacco prices increased by c45% y-o-y to USD6,780/ton, according to Brazil’s tobacco export data from the Ministry of Economics of Brazil. Nonetheless, starting FY24/25e, we expect GPM to normalize, reaching c43% by the end of our forecast period.  As a result, we forecast the EBITDA margin to average c40% over our forecast period, leaving our terminal margin at c41%. As for EAST’s NPM, we expect it to average c41% over FY22/23–27/28e, up from an average of c27% over the past six years, primarily backed by both the machinery leasing income and investment income from UTC. We expect the investment income from UTC to start appearing on EAST’s 4Q22/23 income statement.” Pakinam concluded

 

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

For further information, please contact:

Research@hc-si.com

 

 

 

 

 

 

HC: GB Auto Profitability should be back on track 3Q20

Posted on by Marwa Nakhla

In a recent report, HC Brokerage shared their valuation of GB Auto updating the market on the auto/auto related business. HC maintains their OW rating on compelling valuation.

  • Auto and auto related operations are gaining traction on improved market dynamics and GB Auto presence; auto business to revert to profits this year, on our numbers

  • We forecast GB Capital to continue delivering solid earnings growth and impressive NIMs, filtering through to a 4-year bottom line CAGR of c11%

  • We slightly cut our 12M TP c3% to EGP5.13/share on lower GB Capital valuation, but maintain our OW rating on compelling valuation

Noha Baraka, the head of consumers at HC commented that: “Back on track: The auto and auto related business had been loss-making for almost 8 consecutive quarters. This was mainly driven by a series of events significantly hurting Egypt’s automotive sector. Starting primarily with the delayed availability of foreign currency in 2015, then the EGP floatation, moving to the fierce competition and price wars following the alleviation of import tariffs on European cars, then the “Let It Rust” campaign, and most recently the coronavirus outbreak. However, recent market numbers suggest an improvement since the government lifted some of its precautionary measures leading to the resumption of the licensing and registration of cars, and a c26% y-o-y increase in 3Q20 local passenger car sales volume. Accordingly, we expect a marginal improvement in sales in 4Q20 to reach c43,800 cars, a c9% y-o-y increase, as consumer demand is likely to remain depressed in the short term. Going forward, we expect the PC market to gradually recover and grow at a 4-year CAGR of c10% aided by pent-up demand, lack of public transportation and infrastructure, and not to mention the increased momentum coming from falling interest rates and stable FX rates. We are now more bullish on GB Auto’s outlook given its new launches of more competitive CKD models such as the Chery Arizzo and the Hyundai Accent RB to recoup some of the lost Verna sales, and the introduction of new CBU models such as the Hyundai CN7, along with a focus on high-end cars such as Tuscon, not to mention discontinuing all loss making models. This should be enough for the company to regain some of its lost market share and most importantly partially restore its profitability, despite fierce competition, in our view. We expect GB Auto PC volumes to grow at a 2020–24e CAGR of c13%, implying a terminal market share of 20.8% by 2024e from 16.5% in 2Q20. Similarly, the 3-wheeler business has begun to gain traction once again after being severely hit on a series of new licensing limitations, thanks to strong market dynamics, while the 2-wheelers has continued to show strong performance especially after its cut in prices, which allowed GB Auto to capture some market share gains. We expect volumes to grow at a 2020–24e CAGR of c14% fueled by a robust underlying demand. However, the main challenge will be coming from the regional PC business, in our view, in light of the company’s decision of liquidating its Hyundai brand in Iraq, pushing the remaining 1,700 kit this year, which will weigh on the auto business’ top line. Accordingly, GB Auto announced that it has secured its representation in Iraq through launching MG brand (which is of a higher margin compared with Hyundai), starting with only 250 kits on a monthly basis to assess the market perception of the new brand. Therefore, we opt to be conservative and assume the new MG brand representation in Iraq to stand at 500 cars in 2020 and 3,000 cars in 2021, before growing at a 2021 –24e CAGR of c3%, on average. Thus, our numbers point to auto and auto related 2020–24e revenue CAGR of c13%, some c28% lower than our previous estimates, dragged down by lower regional PCs operations, and to a lower extent due to lower local PC market share for GB Auto.”

“The impact on profitability is more profound with 3Q20 witnessing profits generation: As far as margins are concerned, we expect continued portfolio optimization through the rolling out of new models, in addition to a stronger EGP/USD rate should help the company defend its high margins in the short term. We see auto and auto related business’ gross profit margin expanding 2.9 pp to reach 13.1% in 2020e, however, we believe these high margin levels are unlikely to be sustained over the long-run, reflecting the intensified competition that GB Auto is facing, especially in the PC business. Therefore, we forecast the terminal gross profit margin for the auto and auto related business to stand at 12.3%, still 2.5 pp higher than our previous estimates. We expect the business EBITDA margin to increase to 7.7% in 2020e, from 5.5% in 2019, before normalizing at an average of 5.3% over our forecast period on the back of high SG&A expenses, and as 2Q20 EBITDA was partially inflated by the sale of a land plot. We also see the line of business benefiting from declining interest rates, given its highly leveraged nature, and forecast a c48% cut in 2020–23e interest charges bill. We now expect the auto and auto related business to realize profits starting 3Q20, and be value accretive, removing an overhang on GB Auto’s operations.” Noha Baraka added.

Noha continued: “GB Capital to continue to shield overall company’s profitability: GB Capital has continued to be the company’s star performer despite the pandemic, expanding its EBIT by c21% y-o-y in 1H20, and its loan portfolio by c14% from the end of last year to EGP10.1bn, with NPLs remaining in check at 1.5%. We expect loan portfolio to grow another c10% to reach EGP11.1bn by year end and we do not rule out securitization taking place in 4Q20. We believe GB Capital will continue to deliver solid earnings growth and impressive NIMs until 2021e, despite the cut in interest rates, thanks to its asset/liability duration mismatch through lending at fixed interest rates while borrowing at variable ones, along with the company’s efforts to get preferential rates from banks. Post 2021e, we expect to see the increased competition to cool off NIMs by 1.8 pp to stand at 16.3% by 2024e and largely stabilize at these levels. Accordingly, we expect the business bottom line to grow at a 2020–24e CAGR of c11%, c5% lower than our previous net income estimate, mainly on the back of lower loan portfolio growth and higher provision expenses. More securitization taking place should bolster earnings growth, in our view.”

“Maintain Overweight on compelling valuation: We raise our valuation for auto and auto related business c57% to EGP0.93/share, mainly on the back of our new estimates, lower working capital needs fueled by stronger EGP/USD rate, in addition to using a lower average cost of capital (13.9% versus 14.9% previously). Our valuation of EGP0.93/share puts auto and auto related business at a 2021e EV/EBITDA multiple of 4.8x and an EV/IC of 1.1x. As for GB Capital, we continue to value the business separately, yielding EGP4.20/share, slightly lower from our previous valuation of EGP4.71/share, based on equally weighted global 2021e peers’ average P/B and P/E multiples of 0.9x and 9.3x, respectively, using our 2021e net profit figure of EGP693m. Our 12-month target price of EGP5.13/share implies a potential return of c89% over the 4 November closing price of EGP2.71/share. We therefore maintain our Overweight rating. In our view, the valuation remains compelling, with the stock trading at a 2021e P/E multiple of 3.5x, a c76% discount to its peers’ implied multiple of 14.8x. GB Auto investment case is gaining traction capitalizing on GB Capital’s ongoing solid performance, in addition to a turnaround in the auto and auto related business, lowering the pressure on the group’s balance sheet and hence creating some room for FCF generation, in our view. This should be enough to lift the overhang on the stock performance given that for at least the last year the market has not been assigning any value for the auto business, and has even undermined the value of the group’s financing arm. The long-awaited automotive directive could add further upside to our auto and auto related business numbers, if it goes through.” Noha Baraka concluded.

 

HC: Ex-factory price hike is key for rerating Eastern Company

Posted on by Marwa Nakhla

In its recent report, HC Brokerage presented their updated evaluation of Eastern Company assuring that: “Ex-factory price hike is key for rerating Eastern Company and maintaining our Overweight rating”.

  • Despite resilient product nature, further pricing power limitation lowers our FY20/21–FY23/24e top line estimates by c11%, on average

  • High margins are unlikely to be sustained without outright price increases, in our view

  • We cut our TP c27% to EGP16.2/share on lower estimates, but maintain our Overweight rating on further share price weakness

Noha Baraka, the Head of Consumers at HC commented that: “Limited pricing power, along with a lower USD denominated toll fee, suggest an c11% downward revision to our FY20/21–FY23/24e top line estimates: We are becoming more skeptical about Eastern Company’s margin expansion given its limited pricing power over its products. This was clearly evident following last February’s sales tax hike which was not accompanied with any price benefits for the company. While the new tax brackets mean the cigarettes price could go up by as much as EGP7.50/pack without being subject to a higher lump‐sum tax, we opt to exclude any direct price increases based on the company’s recent pricing strategy. We only account for sales-mix improvement and conservatively assume an annual c1% increase in blended local ex-factory price over our forecast period. This translates to a c13% downward revision to our FY20/21e–FY23/24e blended local ex-factory price estimates. Also, we expect the 2021e renewal of the company’s toll manufacturing agreement with Philip Morris International (PMI), and British American Tobacco (BAT) to kick in at a lower FX rate in light of the EGP appreciation compared to the time of the contract. Our estimates point out to an average rate of EGP16.8/USD down from EGP18.0/USD previously. While several industries got hit during the pandemic, we still assume demand for cigarettes to continue to be fairly resilient thanks to the product’s nature, as the lock-up period, and the working from home environment during the pandemic could cause a further spike in demand. However, we still estimate Eastern Company’s top line growth to be largely muted, growing at a 5-year CAGR c6% over our forecast period, however c11% lower than our previous estimates. We see higher blended ex-factory price as a key catalyst for rerating.”

“High margins are unlikely to be sustained over our forecast period: Over the past couple of quarters, Eastern Company’s gross profit margins have proved quite resilient despite the lack of price increases, mainly on the retailers’ margin cut along with a stronger EGP/USD rate. Despite the limited likelihood of price increases during the next year, and its cost-cutting initiative not kicking in yet, along with the EGP1.5/kg newly imposed development fee on raw tobacco, we still expect high margins to be largely sustained in FY20/21 given that the company is carrying 15 months of inventory procured at a lower EGP/USD rate. We expect Eastern Company’s gross profit margin to stand at 39.4% in FY20/21e, only 0.6 pp lower than our expected FY19/20e estimate and some 2.4 pp lower than our previous estimate. Post FY20/21e, we see margins to contract by some 3.6 pp over our forecast period to 35.8% in FY23/24e. Our SG&A expenses are now c10% lower over our forecast period, but still representing c6% of sales, in line with what management is guiding. This filters through to a c22% downward revision to our FY21/22–FY23/24e EBITDA estimates, leaving our terminal margin at 34.3%. Our new estimates filter through to a c24% downward revision to our EPS estimates on c2% lower net interest income, assuming the company maintains its current raw tobacco inventory level, with any potential interest rate cuts by the Central Bank of Egypt posing a downside risk to our numbers.” Added Noha Baraka.

Noha Baraka concluded that: “Maintain Overweight on share price weakness: In light of our lower estimates, we cut our TP c27% to EGP16.2/share. Our new target price puts the company at a FY20/21e P/E multiple of 8.1x (trading at 6.8x) and EV/EBITDA multiple of 4.5x (trading at 3.6x), and implies a potential return of c28% over the 26 August closing price of EGP12.6/share. We therefore maintain our Overweight rating for the stock. In our view, valuation is compelling, with the stock underperforming the market by c7% since the coronavirus outbreak. Also, dividend yields are becoming more attractive on recent share price drop and we also expect a higher DPO ratio starting FY19/20e on limited CAPEX needs and improved profitability compared to its historical level. In our numbers, we expect the FY19/20e and FY20/21e DPS to stand at EGP1.25/share, implying a dividend yield, net of tax, of 9.4%, and, which is 2.5 pp higher than its 2-year historical average of 6.9%. Based on our FY20/21e DPS estimate and average dividend yield, we arrive to a valuation of EGP17.2/share, which is only c6% higher than our DCF-based valuation, and c36% higher than the current market price, further solidifying our Overweight rating.”