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HC: Edita Food Industries, Resilient Performance

  • 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

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HC: Edita Food Industries, undemanding valuation

  • 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.