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 7 6 5 4 3 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 (2012 16e 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 (2012 14e 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 +202 3535 7356 mai.nehad@hc si.com Key indicators 2010 2011 2012e 2013e Clean EPS (EGP) 0.30 0.32 0.37 0.45 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.
1Q12 results (EGPm) 1Q12 1Q11 %Δ y o y 4Q11 %Δ q o q 1Q12e % dev. Income statement Dairy 300 231 30% 315 5% 283 6% Yogurt 149 103 45% 140 6% 180 17% Juice 100 78 29% 107 6% 90 11% Concentrates 5 13 63% 2 114% 18 74% Agriculture 6 3 109% 11 42% 4 77% Sales 561 428 31% 576 3% 575 2% COGS (373) (267) (390) (363) Gross profit (ex depreciation) 189 161 17% 186 1% 212 11% 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 96 98 2% 84 14% 121 21% 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 1 1 1 1 EBIT 56 66 15% 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 44 58 25% 41 6% 61 28% Taxes (0) (8) 0 (10) Net income before minorities 43 50 14% 41 5% 51 15% Minority interest (0) (0) 0 (0) Recurring net income 43 50 14% 41 5% 51 15% Net margin 7.7% 11.7% 7.2% 8.8% Extraordinary loss (1) (41) Net income after extraordinary loss 43 50 1 51 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 1H11 38.0% 41.4% 37.6% 33.6% 1Q09 1Q10 1Q11 1Q12 33.7% 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% 2009 2010 2011 2012e 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
Corrugated paper prices (1) Powdered milk prices (1) 160 140 Down 9% in 1Q12 from 1Q11 average 5,000 4,500 4,000 Down 16% in 1Q12 from 1Q11 average USD/MT 120 100 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 1,500 60 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
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