Juhayna Food Industries

Transcription

1 Flashnote MENA research Another disappointing quarter 1Q12 results disappoint despite sturdy top line growth, mainly on base effects Easing commodity prices and product price increases to help alleviate margin pressure in 2H12e We reiterate our Neutral rating and TP of EGP5.07/share Juhayna released disappointing 1Q12 results as margin compression continued. Revenue rebounded a strong 31% to EGP561m from a low base in 1Q11 (impacted by the revolution in Egypt and the cessation of exports to Libya) but missed our estimate by a marginal 3%. Gross margin (excluding depreciation) compressed a significant 397 bps to 33.6% (from 1Q11 s already low 37.6%, which was down 380 bps y o y) on the back of (1) liquidation of high cost inventory (mainly powdered milk and packaging material) accrued during 2011, (2) forex related cost increases (25% 30% of total purchases are in USD) that were not fully passed on, and (3) a shift in consumption toward cheaper products. EBITDA margin weakened a wider 583 bps y o y as selling and distribution costs shot up 69% y o y after the company doubled its distribution fleet in 2011 to maintain its market share. Higher depreciation and interest expenses dragged net income down 14% y o y to EGP43m (up 4% q o q after adjusting for EGP41m extraordinary loss). Neutral Target price (EGP) 5.07 Current price (EGP) 4.40 Potential return 15.2% Bloomberg Reuters JUFO EY JUFO.CA Mcap (EGPm) 3,107 Mcap (USDm) 514 Number of shares (m) 706 Free float 47% Daily volume (USDm) 0.6 Foreign own. limit N/A Foreign ownership N/A Note: All prices as of 8 May 2012 Price performance Although we expect 2012e s raw milk purchase price (c60% of COGS) to stay near 2011 s cegp3.0/kg, we believe slight margin enhancement is likely in 2H12e (gross margin of 35.7% versus 34.0% in 1H12e and 34.5% in 2011) as (1) expensive inventory is liquidated and new purchases of powdered milk (orders placed every 6 months) and packaging material (based on annually renewable agreements) are made at now lower global prices and (2) the company s price increase strategy goes into effect (prices of Juhayna and Bekhero milk packages raised 2% in April, the first rise since November 2011). We remain positive on Juhayna s long term revenue prospects ( e CAGR of 19%) but do not expect its strong top line growth to filter through to the bottom line in 2012e due to sustained margin pressure (margins to stay flat y o y in 2012e) and higher interest charges (up 29% y o y in 1Q12) given an aggressive spending program ( e CAPEX of cegp2bn) and a growing debt balance (2012e net debt/ebitda of 1.1x versus 2011 s 0.2x). We maintain our Neutral rating and TP of EGP5.07/share (15% upside). The stock has underperformed the market by 28% y t d, but we opt to maintain our forecasts and valuation until we see a clear reversal in the margin deterioration trend witnessed throughout 2011 and continuing in 1Q12. 2 M J J A S O N D J F M A M JUFO EY EGX30 Mai Nehad Analyst mai.nehad@hc si.com Key indicators e 2013e Clean EPS (EGP) Clean P/E 14.8x 13.7x 12.2x 9.6x Source: Company data, HC Please refer to important disclosures and analyst certifications on pages 4 5 of this report.

2 1Q12 results (EGPm) 1Q12 1Q11 %Δ y o y 4Q11 %Δ q o q 1Q12e % dev. Income statement Dairy % 315 5% 283 6% Yogurt % 140 6% % Juice % 107 6% 90 11% Concentrates % 2 114% 18 74% Agriculture % 11 42% 4 77% Sales % 576 3% 575 2% COGS (373) (267) (390) (363) Gross profit (ex depreciation) % 186 1% % Gross margin 33.6% 37.6% 32.3% 36.9% SG&A expenses (95) (65) 47% (102) 7% (95) 0% Export subsidies 2 2 (0) 3 EBITDA % 84 14% % EBITDA margin 17.1% 22.9% 14.6% 21.0% Depreciation (37) (33) 13% (32) 17% (42) 12% Other income (expense) (4) (0) (2) (3) Associate income EBIT % 51 10% 77 27% EBIT margin 9.9% 15.3% 8.8% 13.3% Net interest expense (12) (6) 84% (10) 18% (16) 26% FX gains (losses) (0) (1) 0 EBT % 41 6% 61 28% Taxes (0) (8) 0 (10) Net income before minorities % 41 5% 51 15% Minority interest (0) (0) 0 (0) Recurring net income % 41 5% 51 15% Net margin 7.7% 11.7% 7.2% 8.8% Extraordinary loss (1) (41) Net income after extraordinary loss Note: (1) Extraordinary loss booked in 4Q11 relates to yogurt factory fire incident; represents difference between book value of damages and recovered amount Significant margin deterioration in 1Q12 mainly at dairy and juice segments 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Expecting gross margin improvement of 170 bps in 2H12 from 1H % 41.4% 37.6% 33.6% 1Q09 1Q10 1Q11 1Q % 38.0% 34.5% 34.3% 2Q09 2Q10 2Q11 2Q12e 47.7% 38.2% 34.3% 35.7% 3Q09 3Q10 3Q11 3Q12e 33.7% 35.4% 32.3% 35.8% 4Q09 4Q10 4Q11 4Q12e 38.7% 38.1% 34.5% 35.0% e 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 10% 20% 39.4% 35.4% 29.5% 44.1% 37.1% 37.9% 49.4% 42.3% 35.2% 16.0% 39.0% 82.9% Dairy Yogurt Juice Concentrates 1Q10 1Q11 1Q12 2

3 Corrugated paper prices (1) Powdered milk prices (1) Down 9% in 1Q12 from 1Q11 average 5,000 4,500 4,000 Down 16% in 1Q12 from 1Q11 average USD/MT Up 19% in 2011 from 2010 average USD/MT 3,500 3,000 2,500 Up 11% in 2011 from 2010 average 80 2,000 1, ,000 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 German corrugated paper index Source: Bloomberg, HC Note: (1) Juhayna s corrugated paper packaging cost is based on an annually renewable agreement with Tetra Pak; packaging makes up c25% of total COGS Milk powder (26% butterfat) Source: Bloomberg, HC Note: (1) Powdered milk purchase orders are placed every 6 months at spot prices; powdered milk represents c20% of total milk used and makes up c60% of yogurt content Risks Upside risks include (1) faster than expected margin recovery due to softening in global commodity prices, (2) higher than expected price increases across product categories, (3) accelerated margin benefits from vertical integration, (4) lower than expected interest charges, and (5) a favorable outcome in the dairy monopoly case. Downside risks include (1) raw milk supply shortage on the back of the outbreak of footand mouth disease among cattle in Egypt (lowered supplies 7% in 1Q12), (2) a sharper than expected impact on margins from currency depreciation and/or raw material cost inflation, (3) less flexibility to raise prices, (4) delayed margin benefits from vertical integration, (5) slower than expected conversion to packaged products, (6) a more adverse than expected impact of competition in the short to medium term, and (7) an unfavorable outcome in the dairy monopoly case. 3

4 Disclaimer HC Brokerage, which is an affiliate of HC Securities & Investment (referred to herein as HC ) a full fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services is exclusively responsible for the content of this report. The information used to produce this document is based on sources that HC believes to be reliable and accurate. This information has not been independently verified and may be condensed or incomplete. HC does not make any guarantee, representation, or warranty and accepts no responsibility or liability for the accuracy and completeness of such information. Expression of opinion contained herein is based on certain assumptions and the use of specific financial techniques that reflect the personal opinion of the authors of the commentary and is subject to change without notice. The information in these materials reflects HC s equity rating on a particular stock. HC, its affiliates, and/or their employees may publish or otherwise express other viewpoints or trading strategies that may conflict with the views included in this report. Please be aware that HC and/or its affiliates, and the investment funds and managed accounts they manage, may take positions contrary to the included equity rating. This material is for informational purposes only and is not an offer to sell or the solicitation of an offer to buy. Ratings and general guidance are not personal recommendations for any particular investor or client and do not take into account the financial, investment, or other objectives or needs of, and may not be suitable for, any particular investor or client. Investors and clients should consider this only a single factor in making their investment decision, while taking into account the current market environment. Foreign currency denominated securities are subject to fluctuations in exchange rates, which could have an adverse effect on the value or price of, or income derived from, the investment. Investors in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk. Neither HC nor any officer or employee of HC accepts liability for any direct, indirect, or consequential damages or losses arising from any use of this report or its contents. Copyright No part or excerpt of this research report s content may be redistributed, reproduced, or conveyed in any form, written or oral, to any third party without prior written consent of the firm. The information within this research report must not be disclosed to any other person until HC has made its information publicly available. Issuer of report: HC Brokerage Building F15 B224, Smart Village KM28 Cairo Alexandria Desert Road 6 October 12577, Egypt Telephone: Fax: Website: si.com IMPORTANT DISCLOSURES Analyst certification: I, Mai Nehad, certify that the views expressed in this document accurately reflect my personal views about the subject securities and companies. I also certify that I do not hold a beneficial interest in the securities traded. Analyst disclosures: The analyst or a member of the analyst s household does not have a financial interest in the securities of the subject company (including, without limitation, any option, right, warrant, future, long or short position). The analyst or a member of the analyst s household does not serve as an officer, director, or advisory board member of the subject company. The analyst s compensation is not based upon HC s investment banking revenue and is also not from the subject company in the past 12 months. 4

5 HC disclosures: Company name: Disclosure: None 1. HC or its affiliates other than Al Futtaim HC Securities beneficially own 1% or more of any class of common equity securities of the subject company. 2. HC or its affiliates other than Al Futtaim HC Securities have managed or co managed a public offering of securities for the subject company in the past 12 months. 3. HC or its affiliates other than Al Futtaim HC Securities have received compensation for investment banking services from the subject company in the past 12 months. 4. HC or its affiliates other than Al Futtaim HC Securities expect to receive or intend to seek compensation for investment banking services from the subject company in the next 3 months. 5. HC has received compensation for products or services other than investment banking services from the subject company in the past 12 months. 6. The subject company currently is, or during the 12 month period preceding the date of distribution of this research report was, a client of HC. 7. HC makes a market in the subject company s securities at the time this report was published. The HC rating system consists of 3 separate ratings: Overweight, Neutral, and Underweight. The appropriate rating is determined based on the estimated total return of the stock over a forward 12 month period, including both share appreciation and anticipated dividends. Overweight rated stocks include a published 12 month target price. The target price represents the analysts best estimate of the market price in a 12 month period. HC cautions that target prices are based on assumptions related to the company, industry, and investor climate. As such, target prices remain highly subjective. The definition of each rating is as follows: Overweight (OW): Estimated total potential return greater than or equal to 20% Neutral (N): Estimated total potential return greater than or equal to 0% and less than 20% Underweight (UW): Estimated total potential return less than 0% NR: Not Rated SP: Suspended Stocks rated Overweight are required to have a published 12 month target price, while it is not required on stocks rated Neutral and Underweight. Distribution of HC ratings Rating Count Percent Percent provided investment banking services in past 12 months Overweight (OW) Neutral (N) Underweight (UW) All HC employees and its associate persons, including the analyst(s) responsible for preparing this research report, may be eligible to receive non product or service specific monetary bonus compensation that is based upon various factors, including total revenues of HC and its affiliates, as well as a portion of the proceeds from a broad pool of investment vehicles consisting of components of the compensation generated by directors, analysts, or employees and may affect transactions in and have long or short positions in the securities (options or warrants with respect thereto) mentioned herein. Although the statements of fact in this report have been obtained from and are based upon recognized statistical services, issuer reports or communications, or other sources that HC believes to be reliable, we cannot guarantee their accuracy. All opinions and estimates included constitute the analysts judgment as of the date of this report and are subject to change without notice. HC may affect transactions as agent in the securities mentioned herein. This report is offered for information purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such would be prohibited. Additional information available upon request. 5