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Initiation of Coverage Egypt Food & Beverages 31 May 2012
JUHAYNA FOOD INDUSTRIES
1 Zeinab El-Beheiry
+202 3300 5328 [email protected]
Got milk?* – BUY JUFO is Egypt’s leading producer of dairy products and its
shares provide direct exposure to the country’s attractive
domestic demand story – a scarcity on the EGX. Strong forecast
revenue growth (20% CAGR over 2012-16E) will be underpinned
by population growth and spurred by the conversion from loose
to packaged milk, product diversification, and growth in per
capita income. Margins are currently under pressure in 2012
owing to higher raw milk prices, but backward integration (into
milk and fruit farms) should boost gross margin and, to a lesser
extent, EBITDA margin, in 2013 and 2014. We value JUFO on a
DCF basis at EGP5.0/share. It trades at a P/E of 9.6x 2013E, at a
41% discount to the developing nations’ peer average of 16.4x.
We initiate with a BUY recommendation.
► Volume growth assured. We forecast JUFO to generate strong
revenue growth at a CAGR of 20% over 2012-16E underpinned
by population growth (2% p.a.) and spurred by the conversion
from the loose to the packaged product, product diversification,
and growth in per capita income. This conversion is in its early
stages, but we believe it will continue to be helped by
marketing/awareness campaigns. Yoghurt sales are responding
to product enhancements and the general increase in health
awareness. Juice penetration is very low (3kg/year) vs. that of
global peers, and the market is due for consolidation. Further,
although large foreign players are entering the dairy sector, we
believe this would stimulate market growth and conversion rate
► Backward integration lifts margins. The increase in raw milk
prices and other cost inflation should see EBITDA margin
contract slightly in 2012 (to 34.1% from 34.8% in 2011). In
addition, the entry of foreign players will exert downward
pressure on margins, through keener prices and greater spend
on branding and marketing. Nevertheless, JUFO aims to secure
up to 50% of its raw milk and fruit needs through its own milk
herd and fruit farm. This should enhance gross margin by c.
200bps in 2013 and 100bps in 2014 and, we believe, this should
lift gross and EBITDA margins in 2013 and 2014; while EBITDA
margin should narrow post 2014
► The powdered milk dilemma. Powdered milk accounts for c.
20% of JUFO’s milk input needs, and we expect this to rise to c.
50% by 2015. We also believe liquid raw milk supply will lag milk
demand and that the current supply gap will widen. Secondly,
we expect the increase in milk consumption to be evident in the
lower-end brands (e.g. Bekhero and Halibo), which have higher
powder content. The greater reliance on powder (more
expensive than liquid milk) also suggests pressure on margins in
the longer term. The import of powdered milk exposes JUFO to
EGP devaluation risk
► Valued on a DCF basis at EGP5.0 per share. We value JUFO on
a DCF basis at EGP5.0/share. It trades at a P/E of 9.6x 2013E, a
41% discount to the developing nations’ peer average of 16.4x.
* “Got Milk?” Is an American advertising campaign encouraging the consumption of milk
Recommendation Buy
Market Price (EGP) 4.3
Fair Value (EGP) 5.0
Upside Potential (%) 17.2
EGX 30 Index 4,686
Stock Data
Reuters Code JUFO.CA
Bloomberg Code JUFO EY
Shares Outstanding (m) 706
Market Cap (EGPm) 3,029
Market Cap (USDm) 501
Free Float (%) 48%
JUFO vs. EGX 30 (rebased)
Source: Bloomberg, NAEEM Research
Financial Indicators & Valuation Multiples
Year to 31 Dec. 2010a 2011a 2012f 2013f 2014f
Revenue (EGP) 1,875 2,251 2,742 3,322 3,991
Revenue (% Δ) 17.3 20.0 21.8 21.2 20.1
EBITDA (EGP) 429 421 499 652 798
EBITDA Margin (%) 22.9 18.7 18.2 19.6 20.0
EPS (EGP) 0.30 0.20 0.32 0.44 0.58
EPS (% Δ) (57.8) (32.4) 58.6 37.6 31.2
P/E 14.2 21.0 13.2 9.6 7.3
P/CPS 6.7 8.8 7.6 5.7 4.6
Yield (%) nm 3.5 nm 6.5 9.3
ROE (%) 20.5 10.8 11.8 14.8 18.1
Net debt/Equity (x) 0.02 0.12 0.32 0.31 0.25
Int. Cov. (x) 5.1 7.3 4.8 5.4 7.0
Source: Company data, Reuters, NAEEM estimates
Closing price as of 30 May 2012
3.43.74.04.34.64.95.25.55.8
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Contents
Volume growth assured ............................................................................................................................................................ 3
Sustainable growth in F&B consumption ................................................................................................................................... 3
F&B resilient to poor economic backdrop.................................................................................................................................................3
Consumption stimulated by rising per capita GDP ................................................................................................................................4
Demographics support future demand growth .......................................................................................................................................5
Underpenetrated market ..............................................................................................................................................................................5
From loose to packaged milk ...................................................................................................................................................................6
Plenty of room for growth in the juice market ......................................................................................................................................7
Yoghurt market more mature, but product enhancements driving sales ..........................................................................................8
Operational catalyst for growth ..................................................................................................................................................................9
Product diversification ............................................................................................................................................................................ 10
Developing B2B relationships ................................................................................................................................................................ 10
Expansion of distribution network ....................................................................................................................................................... 10
Strong top-line growth ............................................................................................................................................................................ 10
Backward integration lifts margins ........................................................................................................................................12
Diversified supplier base ........................................................................................................................................................................ 12
Raising milk yields and quality ............................................................................................................................................................. 13
Securing concentrate for juices .............................................................................................................................................................. 14
Entry of multinational players to shake up milk market ....................................................................................................................... 14
JUFO’s market share to fall .................................................................................................................................................................... 15
Net effect of these two influences on margins ..................................................................................................................................... 16
Risks inherent in both raw milk and powdered milk supply .............................................................................................17
Raw milk pricing hostage to commodity price movements .............................................................................................................. 17
Greater reliance on powdered milk ...................................................................................................................................................... 18
Forex risk .................................................................................................................................................................................................. 19
DCF value of EGP5.0 per share ...............................................................................................................................................20
DCF valuation .......................................................................................................................................................................................... 20
Relative valuation .................................................................................................................................................................................... 21
Litigation ................................................................................................................................................................................................... 22
Appendix 1: Historical and forecast KPIs ..............................................................................................................................23
Appendix 2: JUFO’s summary financials ...............................................................................................................................24
Financial summary: ................................................................................................................................................................................. 25
Disclosure Appendix ................................................................................................................................................................26
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JUHAYNA FOOD INDUSTRIES (JUFO)
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Volume growth assured
► Fast-moving Consumer Goods (FMCG) demand insulated from effects of any
political and economic upheaval in Egypt
► Population growth of c. 2% per annum underpins customer growth
► Food and Beverage (F&B) demand to surge as income levels grow and the
middle-income segment expands
► Health awareness and convenience driving conversion from loose to packaged
dairy products
► Value-added products spurring yoghurt sales
► Juices winning converts from carbonated drinks
► Well-diversified product range
► Strong distribution base and excellent B2B relationships
Although Egypt’s packaged dairy industry was born in the 1980s, it has yet to reach
maturity. We believe the conversion from the loose product will be driven principally
by i) continued growth in per capita consumption reported by the F&B sector, ii) a
large, young population that is seeing a high growth rate, and iii) the under
penetration of packaged dairy products. We forecast market demand for packaged
dairy products to grow at a CAGR of 18% and for juices at a CAGR of 17% over
2012-16E.
Figure 1: Packaged dairy – market size Figure 2: Packaged juices – market size
Source: Company data, NAEEM estimates Source: Company data, NAEEM estimates
Sustainable growth in F&B consumption
F&B resilient to poor economic backdrop
During Egypt’s political upheaval in 2011, private consumption remained relatively
robust and expanded 4.5% YoY in FY11 compared to the 1.8% growth in GDP. This
divergence can be explained by the fact that Egyptians spend the bulk of their
income on basic necessities (particularly food), which means that even during times
of economic or political uncertainty, private consumption remains solid. During
FY11, private consumption represented c. 73% of GDP and FMCGs such as food,
cigarettes, and medicine experienced steady growth despite Egypt’s economic
deterioration.
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Robust private consumption
An array of factors driving market
demand
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Figure 3: Real GDP and consumption growth YoY Figure 4: Disposable income spending by type
Note: We have used fiscal years
Source: CBE, NAEEM Research
Source: CAPMAS, Country data, NAEEM Research
Consumption stimulated by rising per capita GDP
As Egyptians spend the largest portion of their income on basic consumer goods,
companies such as JUFO that operate in the F&B sector will be a direct beneficiary of
rising income levels. Furthermore, as income levels rise, demand for processed and
packaged foods is likely to grow, owing to increased health awareness and as
Egyptians seek more convenience in their daily lives. According to Business Monitor
International (BMI), Egypt’s per capita GDP is set to rise at a CAGR of 14% per
annum through 2016. In addition, the Economist Intelligence Unit (EIU) forecasts
Egypt’s F&B expenditure to rise at a CAGR of 10% per annum through 2015.
Figure 5: Per capita GDP Figure 6: Food, Tobacco & Beverages (FT&B) consumer
expenditure
Source: CBE, BMI, NAEEM Research Source: EIU, NAEEM Research
According to a study conducted by the Food and Agriculture Organization of the
United Nations (FAO), dairy has higher income elasticity of demand (a measure of
the percentage increase in expenditure on dairy resulting from a 1% increase in
income) than do all other sub-categories within the F&B sector. It also has slightly
higher income elasticity of demand than does meat and significantly higher elasticity
than does fish. In other words, as incomes increase, expenditure on dairy products
will grow more rapidly than that on most other food items, in percentage terms. The
following table illustrates that demand for food, including dairy products, is more
responsive to change in income in low-income countries, meaning that growth in
the consumption of dairy products is estimated to react strongly to increases in
income, especially in low- and middle-income countries.
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Real GDP YoY growthPrivate consumption YoY growthPrivate consumption as a % of GDP (RHS)
F&B45%
Housing and public utilities
14%
Education12%
Healthcare8%
Entertainment7%
Savings4%
Auto2%
Electronics8%
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USDbn
Rising per capita income drives
packaged food demand
Diary has higher income elasticity
than other food stuff
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Figure 7: Average expenditure elasticities for food sub-categories (a sample of
144 countries)
Product
Low-income
countries
(N*=28)
Lower middle-
income countries
(N=36)
Middle-income
countries
(N=36)
High-income
countries
(N=44)
FT&B 0.81 0.77 0.70 0.54
B&T 1.73 1.13 0.92 0.67
Cereals 0.59 0.49 0.34 0.08
Meat 0.80 0.76 0.69 0.53
Dairy 0.83 0.79 0.72 0.55
Fish 0.69 0.64 0.56 0.42
Fats, oils 0.60 0.50 0.37 0.15
Fruits 0.66 0.60 0.51 0.36
Other foods 1.82 1.23 0.98 0.70
Note: N denote sample size
Source: FAO working paper No. 12-01, NAEEM Research
Demographics support future demand growth
Egypt has a young population of c. 85m, which is growing at a c. 1.9-2.0% per
annum (one of the highest growth rates among developing nations). Egypt is also
the most populous country in the Arab world and thus, potentially, the most
dynamic FMCG market in the Middle East. Those under 20 years of age and who
currently represent 41% of the population comprise both the customer base for the
next 10 years and the main driver of future growth in domestic consumption.
Figure 8: Population growth Figure 9: Breakdown of population by age
Source: Department of Economic and Social Affairs, NAEEM estimates Source: CBE, NAEEM Research
Underpenetrated market
The Egyptian dairy and juice product markets are among the most underpenetrated
in those emerging economies with very low per capita consumption; this can be
attributed, in part, to the lack of affordability and health awareness. Accordingly, the
expected growth in per capita income, a better redistribution of wealth among
segments (especially post revolution), and the expansion of the middle class,
combined with the demographic factors mentioned above, create a strong backdrop
to support volume growth.
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Thailand Turkey Brazil
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20-4943%
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Young and fast growing population
Egypt dairy and juice market
underpenetrated
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Figure 10: Per capita dairy consumption Figure 11: Per capita milk consumption vs. GDP per capita
Source: Company data, NAEEM Research Source: Company data, IMF, NAEEM Research
Moreover, the market is currently experiencing a structural shift towards packaged
milk and juices (away from the loose product), as consumers become more health-
conscious as a result of awareness campaigns and as the entry of international
players with their depth of experience in marketing and R&D impact the market. The
effect of the latter factor is evident from the sharp acceleration in the conversion
rate in yoghurt following the entrance of foreign brands such as Danone, Lactel, and
Nestlé.
From loose to packaged milk
The Egyptian milk market comprises both loose and packaged products, with the
former still accounting for 87% of the total market in 2011. This is attributed to the
lack of health awareness among the majority of Egyptians who are of the view that
loose milk (delivered by peddlers to the home) is healthy, natural, and unprocessed
and that boiling milk at home will lessen the hazards. We note, however, that loose
milk does not go through the sterilisation, pasteurisation, or UHT processes.
Given the health hazards associated with loose milk (e.g. the risk of Salmonella, E.
coli, and Listeria), an awareness campaign was launched through public-private
collaboration between the Ministry of Health (MoH), TetraPak, and the dairy
companies in August-December 2009 under the slogan “Packed milk is safe, and the
Ministry of Health is the guarantee”, highlighting the dangers of loose milk. The
campaign included educational seminars targeting school children and television
advertising aimed at adults, especially mothers. This led to an improvement in the
conversion rate from 11% in 2009 to 13% in 2011. The second phase of the
campaign was launched in June 2010, and the third phase has been postponed
owing to the political turmoil in Egypt, but is likely to be launched in 1H13. We
estimate the conversion rate to reach 22% by 2016 with the continuation of the
campaign and marketing activities by international players.
A similar awareness campaign was conducted in Turkey, where packaged milk
consumption increased from 32% of the market in 2002 to 61% in 2011 (according
to TetraPak). The campaigns were, again, led by TetraPak in partnership with the
MoH and milk producers, and were communicated through television, advertising,
and educational seminars.
We see the possibility of replicating the Turkish model in Egypt, albeit at a slower
pace given the lower literacy and urbanisation rates, lower per capita income, and
higher income disparity. As with the yoghurt segment, we believe that the entry of
international players into milk sales will stimulate the conversion to packaged milk as
well.
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Milk consumption per capita (kg)
GDP per capita (USD'000s)
Shift from loose to packaged
products
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JUHAYNA FOOD INDUSTRIES (JUFO)
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Figure 12: Egypt’s milk conversion rate Figure 13: Turkey’s milk conversion rate
Source: Company data, NAEEM estimates Source: Company data, NAEEM Research
Figure 14: Urbanisation Figure 15: Adult literacy
Source: World Bank, NAEEM Research Source: : UNESCO, World Bank, NAEEM Research
Plenty of room for growth in the juice market
Egypt’s hot, dry climate and avoidance of alcohol are key factors influencing the
growth in soft drinks. The juice market is currently dwarfed by the carbonated soft
drinks (CSD) market, as Egyptian consumers are amongst the lowest consumers of
juices worldwide; in 2011, per capita consumption came in at 3kg cf. 26kg in Saudi
Arabia. Egypt’s per capita CSD consumption, on the other hand, was 39kg.
This surprisingly low consumption of juice may be explained by a lack of awareness
of the side-effects of CSDs (a can contains an average of 40g, or 10 cubes, of sugar),
juice not being considered a necessity as is milk, Egyptians having historically been
consumers of caffeinated drinks such as tea and coffee, and the lack of strong
marketing campaigns such as those run by CSD market giants Pepsi and Coca-Cola.
There is now more effort being directed at improving health awareness [e.g. the
“five-a-day” recommendation and negative publicity about the high-fructose corn
syrup (HFCS) content in CSDs] and more being spent on marketing; such efforts, we
believe, should result in an increased acceptance of juices.
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Brazil
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Egypt’s per capita juice consumption
surprisingly low
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Figure 16: Per capita juice consumption Figure 17: Egypt’s per capita CSD consumption
Source: Company data, NAEEM Research Source: BMI, NAEEM Research
Egypt’s juice market is highly fragmented; 2011 saw over 300 active players. We
believe, however, that JUFO could boost the sales in this segment by acquiring
smaller niche players. It has already introduced multiple products that cover
different market segments, including bottled juice drinks, and has introduced new
flavours to its high-end (high-margin) brand “Juhayna Pure”. Although we are
concerned about the current shift in consumer preference to the cheaper, low-
margin drink category from the nectar and pure categories in 1Q12, we think this
may be linked to the present economic situation, and that it will adjust following
economic recovery.
Figure 18: Egypt’s juice market by package type Figure 19: Egypt’s juice market by fruit content
Source: Company data, NAEEM Research Source: Company data, NAEEM Research
Yoghurt market more mature, but product enhancements driving sales
The yoghurt market has experienced strong growth over recent years, owing to a
rapid conversion (from the loose product), the introduction of value-added products
(e.g. light, digestive, and flavoured products), and strong marketing campaigns.
Moreover, the price difference between the packaged and the loose product is only
10% (in milk, the difference is at least c. 20%), as loose yoghurt is also sold at retail
outlets and retailers pass their fixed costs to the end user (whereas milk peddlers
have very marginal fixed costs).
Yet, Egypt’s yoghurt consumption per capita is relatively low compared with that of
peers, at c. 3kg per capita cf., for example, Tunisia’s 7kg per capita (Figure 20). This
could be a result of the different diet patterns between the two countries: yoghurt is
an essential component in Tunisian daily meals but only a seasonal product in Egypt
– in high demand during summer months and Ramadan to aid digestion. We
believe, however, that there is still substantial room for per capita consumption
growth.
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Good market segmentation
Product development key in yogurt
segment
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JUHAYNA FOOD INDUSTRIES (JUFO)
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Egyptian packaged yoghurt producers have latched on to the digestion-aid
properties in their advertising campaigns, and this has led to the rapid conversion to
packaged yoghurt over the past three years, a trend that we expect to continue over
the next few years, albeit at a slightly slower pace. We also expect more value-added
products to be introduced, particularly those with health properties.
Figure 20: Per capita yoghurt consumption Figure 21: Yoghurt conversion rate
Source: Company data, NAEEM Research Source: Company data, NAEEM Research
Operational catalyst for growth
JUFO commenced operations in 1987 as one of the producer of long-life packaged
dairy products in Egypt, with a total capacity of 35 tons/day (now 2,900 tons/day).
This includes milk, cream and cheese, spoonable and drinkable yoghurt, and fruit
juice and juice concentrates all under the brand names “Juhayna” and “Bekhero”. It
has a leading market share of 73% in the packaged milk segment (plain and
flavoured), 28% in the packaged yoghurt segment (spoonable and drinkable
yoghurt), and 17% in the packaged juice segment. It also boasts a large, well-
developed distribution network, which affords it access to a significant portion of
Egypt’s population. In addition, it has a core portfolio of large corporate customers
who buy its products in bulk, and often on longer-term contracts.
The majority of JUFO’s products are sold locally, but it also exports dairy and juice
products, mainly to Libya and the Middle East. The company estimates its market
share in Libya was c. 20-30% in 2011.
Figure 22: Breakdown of revenue by line of business Figure 23: Breakdown of sales
Source: Company data, NAEEM Research
Note: 85% of exports is milk
Source: Company data, NAEEM Research
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Loose yoghurt Packaged yoghurt
Dairy51%
Yoghurt27%
Juices19%
Concentrates2%
Agriculture1%
Local 94%
Export6%
Large market shares across market
range
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Product diversification
JUFO is unique among dairy and juice producers in Egypt in that it has allocated a
separate factory for each segment. Each line of business (LoB) has also diversified its
product range to meet the needs of customers across income levels, to cater to
different tastes, and to promote various health properties. This enables JUFO to
maintain its leading market share in each segment.
Figure 24: JUFO’s product diversification
Milk products Yoghurt products Juice products
Juhayna Spoonable (plain, fruit, light, flavoured, sweetened, and mixed) Nectar (25-50% fruit content)
Bekhero Drinkable (Rayeb and Zabado) Pure (100% fruit content)
Halibo Bekhero drinks (
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JUHAYNA FOOD INDUSTRIES (JUFO)
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Figure 25: Breakdown of annual revenue
Source: Company data, NAEEM estimates
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Backward integration lifts margins
► Diversifying sources of raw material to counter bargaining power of suppliers
► International players entering or acquiring locals intensifies competition
► Backward integration to secure 50% of own raw material supply should boost
margins in 2013-14 and temper the downward pressure from competition
thereafter
JUFO faces two major issues that influence its longer-term operating performance
and profitability: i) the availability of raw materials at reasonable costs and the
requisite quality and, ii) aggressive competition from the growing presence of
international players with proven business models. To address these issues, JUFO
has adopted a two-pronged approach – first, to backwardly integrate to secure raw
materials and second, product diversification/market segmentation.
Diversified supplier base
Raw and powdered milk are the main components of milk products and yoghurt,
while fruit and concentrates are the main inputs for juices. Raw and powdered milk,
combined, account for c. 55% of COGS, while raw milk alone accounts for 30% of
GOGS.
Since 2008, management has established multiple sources for its raw material needs,
diversifying among local suppliers, JVs, and recently, its own dairy and fruit farms.
JUFO plans to meet c. 40-50% of its raw milk and fruit requirements from its own
farms by 2015.
Figure 26: Breakdown of COGS
Source: Company data, NAEEM Research
Currently, JUFO relies on the following sources to meet its raw material
requirements:
► Local dairy farms (including small-scale herds)
► Its JV Milkes Dairy (in which it owns c. 40%) that provides 10% of its raw milk
requirements
► Milk powder, butter oil, and milk protein from Denmark and New Zealand
► Concentrates from its concentrates subsidiaries
► Packaging from Sweden’s TetraPak (for packaging dairy products) and
Switzerland’s Combibloc (for packaging juice products)
Raw and powdered milk
55%Packaging costs
25%
Manufacturing13%
Sugar concentrates
7%
Moving to secure 50% of raw milk
and fruit production requirements
JV Milkes Dairy provides 10% of its
raw milk requirements
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JUHAYNA FOOD INDUSTRIES (JUFO)
13
Raising milk yields and quality
Raw milk is the core input in packaged milk and the second-largest ingredient for
yoghurt products. Challenges include securing the required quantity of milk of the
right quality [below the international standard of 50,000 total bacterial
count/millilitre (TBC/ML)] without delivery interruption, while avoiding being
squeezed by the bargaining power of milk farmers.
Prior to 2008, JUFO used to rely on local suppliers with herd sizes of c. 100-200
cows; subsequently, for cost-control purposes, it broadened its milk supply network
to farmers with smaller herds (of c. 10-100 cows). To ensure the quality of the raw
milk, it also worked closely with milk suppliers with agreements ranging from
contract farm management to the close supervision of the milking process.
In 2008, JUFO entered a JV with Milkes, the owner of a state-of-the-art dairy farm
that currently satisfies c. 10% of JUFO’s milk requirements. Managing its own dairy
has enabled it to meet the strict quality measures (TBC/ML of below 20,000), and it
has also been able to raise milk yield per cow through controlling the feed process:
Milkes achieves one of the highest yields in Egypt at c. 40kg/day (cf., on average,
only 2.9kg/day for other dairies); this is, however, still low compared with
international standards. JUFO plans to continue with its integration plan either by
increasing its stake in Milkes or by acquiring other targets.
Figure 27: Progression of Milkes’s yield per cow Figure 28: Egypt’s market yield per cow
Source: Company data, NAEEM Research Source: Company data, NAEEM Research
Figure 29: Global annual yield per cow
Source: FAPRI World Agriculture Outlook 2011, NAEEM Research
28
31
34
37
40
08A 10A 9M11A
kg/day
2.4
2.5
2.6
2.7
2.8
2.9
08A 09A 10A 11A
kg/day
0.5 5.5 10.5 15.5 20.5 25.5
Egypt
Algeria
New Zealand
Australia
EU
US
Saudi Arabia
kg
Securing high quality raw milk is key
Milkes’ yields among highest in Egypt
-
14
In order to further satisfy its raw milk needs in-house, JUFO has acquired 19,500
acres of land to establish its own dairy, agriculture, fruit and cattle-feed farm, and
has planned to purchase 14,000 higher-yielding cows from countries such as New
Zealand, Germany, Portugal, and Australia over the next five years, with the first
batch of 700 cows to be received by year end.
As raw milk accounts for c. 30% of dairy COGS and c. 28% of yoghurt COGS,
securing c. 40% of its raw milk needs by 2014 through its own farms would give
JUFO an edge in controlling its raw milk prices (which are currently highly volatile).
Such self-supply should improve margins and protect it against wild margin swings
that are largely dictated by raw milk prices as illustrated in Figure 31.
Figure 30: Fresh cow milk prices fluctuating Figure 31: Milk cost and JUFO’s gross margin
Source: FAO, NAEEM Research Source: Company data, NAEEM Research
Securing concentrate for juices
Concentrates represent the main input in juice production. Therefore, to secure
supply, JUFO has again applied backward integration: it acquired concentrate
producer El-Marwa Food Industries Company in 2009, which it subsequently
supplied with new machinery. It also established a wholly owned subsidiary –
Modern Concentrate Company – in 2008 and in 2011, acquired 10,000 feddans of
land to grow its own fruit to produce concentrate. At present, c. 80% of JUFO’s
concentrate production satisfies c. 75% of its requirements for juice production (the
rest is imported), while the balance is sold to third parties. As the fruit farm matures,
the captive raw material supply should positively impact margins.
Entry of multinational players to shake up milk market
Multinational companies are keenly interested in the Egyptian FMCG sector,
attracted by the under penetration of F&B products and the size of the market.
In one sense, the entry of the larger international players into the milk market may
be beneficial in that it should grow the market size for all players and provide
momentum to the conversion rate (through introducing new value-added products
and spending on marketing and advertising campaigns to enhance consumer
awareness), as has been the case in the yoghurt segment.
Nevertheless, the entry of international heavyweights will result in JUFO’s losing
market share and increase risk of competition depressing prices. Although this was
not evidenced by the yoghurt segment, likely because of the small price difference
between loose and packaged yoghurt, the price differential is much larger in milk,
and this leaves more room for price action to gain market share.
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
98A
99A
00A
01A
02A
03A
04A
05A
06A
07A
08A
09A
10A
11A
EGP/Litre
24
26
28
30
32
34
36
38
40
42
410
460
510
560
610
660
710
760
810
07 A 08 A 09 A 10 A 11A
%EGPm
Cost of raw and powdered milk Gross margin (RHS)
Its own dairy will use high-yield cows
Self supply to help margins and
smooth cost swings
JUFO is largely self-sufficient in
concentrates
International players entering Egypt’s
dairy market
Entry of new players to stimulate
market demand…..
-
JUHAYNA FOOD INDUSTRIES (JUFO)
15
JUFO’s market share to fall
JUFO currently holds the largest market share in all dairy and yoghurt segments, and
the second-largest share in juice (after Faragello).
Figure 32: JUFO’s market share by product, 2011
Product Market share Market position
Plain milk 70% 1
Flavoured milk 74% 1
Spoonable yoghurt 30% 2
Drinkable yoghurt 73% 1
Pure juice 90% 1
Nectar juice 21% 1
Source: Company data, NAEEM Research
Although we believe that JUFO would benefit from the backward integration, its
distribution network, and brand loyalty, we see competition intensifying going
forward with the entrance of international players.
Figure 33: JUFO’s milk market share
Source: Company data, NAEEM estimates
► In June 2009, Citadel Capital acquired Enjoy (Nile Company for Food Industries)
through its regional agri-food platform, Gozour, that also owns Dina Farms, the
largest dairy farm in Egypt, and El-Misriyeen, a key producer of white cheese
► In October 2009, Almarai acquired International Company for Agro-Industrial
Projects (Beyti), through its regional International Dairy and Juice Ltd (IDJ) JV
with PepsiCo. Almarai is to spend c. USD18m to bring Beyti to full capacity and
is targeting to control c. 50% market share by 2013
► Lactalis acquired Nestlé’s yoghurt business in Egypt and now sells under the
Lactel and Nestlé brand names
In addition, some of these players already have well-diversified business lines in
Egypt; for example, Nestlé also produces Mövenpick ice cream, Cerelac, Maggi, and
Nestlé-branded bottled water and yoghurt, among others. A player such as Nestlé
also has a sizeable distribution network already in place.
Accordingly, we forecast JUFO’s market share to decline over the next five years,
particularly in dairy, as we see tough competition, chiefly from IDJ. We estimate
JUFO’s milk market share to fall to 63% by 2016.
60
62
64
66
68
70
72
74
09A 10A 11A 12F 13F 14F 15F 16F
%
…… but JUFO market share to fall
-
16
Net effect of these two influences on margins
As JUFO reaps the benefits of its backward integration over the next two years, we
expect gross margin to widen by c. 200bps in 2013 and c.100 bps in 2014, to reach
36.4% and to remain relatively flat thereafter. However, with intensifying competition
from international players, we see increased operating costs negating some of the
positive effect at the EBITDA level, although we still see improvement in EBITDA
margin in 2013 and 2014. Post 2014, however, we believe the strengthening
competition (with potential price pressure) will result in lower margins at the EBITDA
level.
Figure 34: JUFO’s gross vs. EBITDA margins
Source: Company data, NAEEM estimates
18
19
20
21
22
23
24
25
32
34
36
38
40
09A 10A 11A 12F 13F 14F 15F 16F
%%
Gross margin EBITDA margin (RHS)
Margins up over 2013-2014, but
squeezed thereafter
-
JUHAYNA FOOD INDUSTRIES (JUFO)
17
Risks inherent in both raw milk and powdered
milk supply
► Raw milk prices are impacted by the movement in the prices of animal feed,
particularly corn, soya, and alfalfa
► Even with its own milk supply, JUFO still impacted by feed prices
► Powdered milk covers 20% of milk needs; expected to rise to 50%
► Shift in sales mix towards low-tier brands means more use of powdered milk
► Substitution of powdered for raw milk adds to margin pressure
► EGP deprecation is a key risk factor
As noted previously, raw materials account for 55% of JUFO’s total COGS, with 30%
of total COGS is for the cost of raw milk. JUFO is currently applying a pricing strategy
that aims to pass raw material price increases through to the end consumer, but
there is often a lag, and the pass-through is not always perfect. At times, the process
breaks down completely; for example, in 2008, milk prices rose 30%, and JUFO was
unable to pass this through – this resulted in its 2008 gross margin contracting by
1.4pps.
Other components of COGS include packaging and labour. Packaging prices are
more stable, as they are based on annual renewable agreements with TetraPak;
labour costs represent only 2% of COGS.
Raw milk pricing hostage to commodity price movements
Raw milk prices are largely impacted by the price of commodities used in animal
feed, mainly corn and alfalfa.
In an effort to reduce raw milk price volatility, JUFO has signed long-term contracts
with dairy farms to fix raw milk prices based on a price formula that is revised
quarterly reflecting movements in feed prices and seasonal factors. Nevertheless, the
volatility in feed prices still has a significant impact. While corn price started to ease
in 2012, JUFO won’t see the impact of this unless prices remain lower over the next
two months until JUFO purchases its next batch to cover the requirements for the
following six months.
Figure 35: Corn vs. milk prices
Source: Bloomberg, NAEEM Research
In 2011, gross margin dipped to 34.8% from 38.8% in 2010, impacted by an increase
in the average raw milk price from EGP2.6/kg in 2010 to EGP3.1/kg in 2011 (+19%
YoY).
105
165
225
285
345
405
465
525
585
645
No
v-0
5
Feb-0
6
May-0
6
Aug
-06
No
v-0
6
Feb-0
7
May-0
7
Aug
-07
No
v-0
7
Feb-0
8
May-0
8
Aug
-08
No
v-0
8
Feb-0
9
May-0
9
Aug
-09
No
v-0
9
Feb-1
0
May-1
0
Aug
-10
No
v-1
0
Feb-1
1
May-1
1
Aug
-11
No
v-1
1
Feb-1
2USD/ton
Corn Milk (Rebased)
Raw milk accounts for 42% of raw
material costs
Raw milk price influenced by animal
feed prices
-
18
We forecast raw milk prices to rise 5-7% in 2012, taking into account that they have
already increased by 7% YoY in 1Q12 to EGP2.95/kg, partially impacted by the
prevalent foot-and-mouth disease (FMD) outbreak (only 7% of raw milk supply has
so far been impacted).
JUFO’s management sees a gradual increase of c.6% in milk selling prices
throughout 2012 (JUFO raised selling prices by 2% in April).
Greater reliance on powdered milk
Powdered milk represents c. 20% of total milk raw materials used by JUFO; we
expect this percentage to gradually increase to reach 50% over the medium term,
owing to the scarcity of raw milk and the change in the sales mix towards lower-
middle income products (the bulk of sales come from Bekhero).
We also forecast the gap between milk demand and the supply of raw milk to widen
further. Cow milk production currently covers 90% of Egypt’s fluid milk consumption,
as Egyptian milking cow heads are growing relatively slow and with relatively low
yield.
JUFO also substitutes powdered milk for raw milk according to availability because
of seasonality [milk yields fall drastically (by 20%) during summer]. Thus, if the
demand for products increases significantly in the future, without the supply of raw
milk keeping up (as we expect it to), JUFO may need to adapt the formulations of all
its products, i.e. substituting raw milk with powdered milk, which would again
squeeze margins.
Figure 36: Egypt’s cow milk production and consumption Figure 37: Egyptian milking cow heads
Source: Company data, NAEEM Research Source: FAPRI World Agriculture Outlook 2011, NAEEM Research
Furthermore, as the lower-income segments in Egypt’s population shift towards the
packaged product, they are likely to prefer the low-tier brands that are offered at
prices closer to that of loose milk (i.e. at least 20% cheaper than premium packaged
milk). These products include a considerable amount of powdered milk and are
packaged using lower-quality packing materials.
Figure 38: JUFO’s milk products
Product Price premium to loose milk (%) Targeted income segment
Juhayna 20 High
Bekhero 5-9 Middle
Halibo - Low
Source: Company data, NAEEM Research
Powdered milk prices track raw milk prices, albeit with greater volatility. On average,
over the past 10 years, powered milk prices have traded at a premium to raw milk
prices internationally. Thus, whether it being due to changes in consumption
1.45
1.50
1.55
1.60
1.65
1.70
1.75
1.80
1.85
1.90
01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A
Tons (m)
Cow milk production Fluid milk consumption
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1,590
1,610
1,630
1,650
1,670
1,690
1,710
1,730
02A 04A 06A 08A 10A 12F 14F 16F
%
No. of milk cows YoY growth (RHS)
Heads ('000s)
Lower-tier brands to see highest
demand
Powdered milk component is to rise
-
JUHAYNA FOOD INDUSTRIES (JUFO)
19
patterns (to lower-end products) or the scarcity of raw milk, the resultant use of
more powdered milk should adversely impact margins.
Forex risk
JUFO imports powdered milk from Arla Foods of Denmark and Fonterra of New
Zealand, in addition to packaging. These products are priced in USD, and therefore
JUFO faces forex risk if the EGP continues to depreciate against the dollar.
Management is trying to overcome this by actively hedging its powered milk
purchases (through auctions, forward sales or deals). NAEEM’s forecasts are for a
gradual depreciation in the EGP to 6.3 to the USD by end-2012. We believe that if
this materialises, the currency effect can be passed through, to a large extent, in the
selling price; however, if we are wrong and there is a sudden, larger devaluation of
the currency, this could have an even more severe impact on margins.
Figure 39: Powdered vs. Milk prices Figure 40: EGP depreciation against the USD
Source: Bloomberg, NAEEM Research Source: Bloomberg, NAEEM Research
200
250
300
350
400
450
500
550
600
650
Feb-0
6Jun
-06
Sep
-06
Dec-0
6M
ar-
07
Jun
-07
Sep
-07
Dec-0
7M
ar-
08
Jun
-08
Sep
-08
Dec-0
8A
pr-
09
Jul-
09
Oct-
09
Jan
-10
Ap
r-10
Jul-
10
Oct-
10
Jan
-11
Ap
r-11
Jul-
11
Oct-
11
Jan
-12
Powdered milk Milk (Rebased)
5.6
5.7
5.8
5.9
6.0
6.1
May-1
0
Jul-
10
Sep
-10
No
v-1
0
Jan
-11
Mar-
11
May-1
1
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar-
12
May-1
2
USD/EGP
Powdered milk and packaging are
priced in USD
-
20
DCF value of EGP5.0 per share
We have valued JUFO’s business as a whole on a discounted cash flow (DCF) basis,
but have also provided a comparable multiple analysis with global peers.
Our DCF valuation indicates a fair value of EGP5.0. Meanwhile, JUFO trades at a 41%
discount to emerging market peers on a P/E basis (2013E) and at a 53% discount on
an EV/EBITDA basis (2013E).
Although we see JUFO recording strong revenue growth over our forecast period
(even despite projected market share loss), we are more conservative on margins
than is market consensus. We expect gross margin to rise through 2013 and 2014, as
JUFO benefits from backward integration (i.e. owning its own dairy farm and fruit
plantation). We believe, however, that margin improvement will be more subdued at
the EBITDA level, given the cost pressures associated with rising competition and the
challenges of managing a more complex organisation. Post 2014, we forecast gross
margin to remain stable, but the EBITDA margin to see a gradual decline through
the remainder of the forecast period.
The net effect of these influences is still for JUFO to generate a forecast 2012-16 EPS
CAGR of 26%. With the share currently trading at a P/E of 10x 2013E, its PEG ratio is
attractive cf. the peer group’s at just 0.3x.
Note, however, that our DCF valuation does not reflect any assumption of a likely
fine by the Egyptian Competition Authority for anti-competitive behaviour. In a
worst-case scenario, where the maximum fine (EGP300m) is levied, this would lower
our fair value by 8% to EGP4.6.
Catalysts to the upside:
► Faster conversion to packaged products
► Flexibility to pass any increase in input cost to end user
► Easing in global soft commodity prices
► Backward integration succeeding in improving margins more than we expected
► A favourable court decision regarding monopolistic practices
Potential risks:
► A more rapid depreciation of the EGP
► A slower path taken by the conversion assumption
► Failure to satisfy 40-50% of its raw material needs internally by 2015
► Tougher competition
► An unfavourable outcome in the monopoly lawsuit
DCF valuation
Using a WACC of 15.5%, our DCF valuation arrives at a fair value of EGP5.0 per share
(taken as our target price), which offers an upside potential of 18%. Our DCF model’s
forecast period was run through to 2019 to account for the tax holidays granted to
several of JUFO’s operating subsidiaries ending in 2018, which would result in a
spike in the effective tax rate. We have assumed perpetual growth in the terminal
period of 4%.
A DCF-based fair value of
EGP5.0/share
Trades at substantial discount to
peers on P/E basis
We used a WACC of 15.5% and LTG
of 4%
-
JUHAYNA FOOD INDUSTRIES (JUFO)
21
Figure 41: Assumptions for WACC calculation
Assumption
Risk-free rate of return 12.0%
Pre-tax cost of debt 13.0%
Equity risk premium 7.0%
Beta 0.86
Tax rate 25.0%
Target debt weighting 30.0%
Target equity weighting 70.0%
Cost of equity 18.0%
WACC 15.5%
Figure 42: Sensitivity analysis – value per share
WA
CC
Terminal growth rate
5.0 14.5% 15.0% 15.5% 16.0% 16.5%
3.0% 5.4 5.0 4.7 4.4 4.1
3.5% 5.5 5.2 4.9 4.5 4.3
4.0% 5.8 5.4 5.0 4.7 4.4
4.5% 6.0 5.6 5.2 4.9 4.5
5.0% 6.2 5.8 5.4 5.0 4.7
Relative valuation
We also compared JUFO with selected global peers in the dairy and juice sectors.
However, as growth rates in the FMCG sector, including in the consumption of dairy,
yoghurt, and juice, differ between developed and developing regions, we have
broken the analysis down to developed country and developing country peers. JUFO
currently trades at a 2013E P/E of 9.6x, a 41% discount to the developing country
peer average of 16.4x, and also trades at a substantial discount on a 2013E
EV/EBITDA basis (5.0x versus 10.8x). This, despite JUFO’s superior earnings growth
(PEG of 0.3x). We believe that the discount is, to a large extent, a function of
perceived risk in Egypt rather than of JUFO’s fundamentals. We therefore believe
that as Egypt’s future become clearer post the presidential elections, JUFO’s share
will rerate towards peer averages. This implies attractive upside for the share.
Large discounts to developing
markets’ peers on P/E and EV/EBITDA
basis
-
22
Figure 43: Comparable valuation
Company name Country
Market cap. P/E EV/EBITDA
(USDm) 12f 13f 12f 13f
Developed
Nestlé Sa-Reg Switzerland 188,732 16.7 15.4 11.5 10.7
Danone France 41,482 16.3 14.8 10.8 10.0
Saputo Inc. Canada 8,168 17.2 15.7 10.7 10.1
Parmalat Spa Italy 3,511 14.6 13.7 3.5 3.4
Dean Foods Co. United States 2,804 13.1 11.6 7.5 7.2
GlanbiaPlc Ireland 2,065 11.5 10.4 9.0 8.4
Emmi Ag-Reg Switzerland 1,001 10.3 9.8 5.9 5.8
Morinaga Milk Industry Co. Japan 920 15.2 10.5 5.2 5.0
Dairy Crest Group Plc Great Britain 653 6.5 6.6 5.3 5.4
Developed markets average 13.5 12.1 7.7 7.3
Developing
Nestle India Ltd India 7,638 37.4 30.8 23.3 19.1
AlmaraiCo. Ltd Saudi Arabia 7,306 18.3 15.5 14.4 12.0
Inner Mongolia Yili Indus-A China 5,700 18.2 14.7 10.8 8.9
China Mengniu Dairy Co. Hong Kong 4,736 17.2 13.3 8.0 6.4
Nestlé (Malaysia) Berhad Malaysia 3,923 25.3 23.7 17.3 16.3
Vietnam Dairy Products Jsc Vietnam 2,332 9.8 7.3 7.1 5.3
Bright Dairy & Food Company Ltd-A China 1,639 35.1 26.3 22.5 19.9
Yashili International Holding China 594 10.7 10.4 1.9 1.8
Saudi Dairy & Foodstuff Co. Saudi Arabia 485 12.7 12.1 9.2 8.9
Pinar Sut Mamulleri Sanavii Turkey 399 9.7 19.4 9.4 8.0
Developing markets average 19.4 16.4 12.6 10.8
Overall average 16.6 14.3 10.3 9.2
JUFO Egypt 501 13.2 9.6 6.6 5.0
Source: Bloomberg, NAEEM estimates
Litigation
In March 2010, the Egyptian Competition Authority (ECA) accused JUFO, Beyti, and
Enjoy of carrying out monopolistic activities by manipulating milk prices by
purchasing raw milk at a marginal discount to the fair market price, which is in
violation of Egyptian Competition Law.
According to JUFO, this issue dates back to 2001 when the Ministry of Agriculture
formed a committee (comprising milk producers and suppliers) for pricing raw milk.
In 2005, the Ministry of Trade and Industry issued a law that prohibited suppliers
and producers from colluding to fix prices, which appeared to be in direct
contradiction to the Ministry of Agriculture’s instructions to set prices through the
pricing committee. On several occasions thereafter, JUFO requested a clarification
from both ministries, but received no response. In 2010, it withdrew from
participating in the pricing committee, in accordance with the Ministry of Trade and
Industry’s law.
In November 2011, the Egyptian Competition Authority (ECA) referred the case to
the public prosecutor. JUFO believes it has a strong case, in that it had been required
by the Ministry of Agriculture to set prices through the committee. Nevertheless,
according to Egypt’s anti-trust law, the fine for violations range between a minimum
of EGP100k and a maximum of EGP300m. The maximum value represents 47% of
JUFO’s current cash balance. Our gut feel is that there will, in the end, be a
compromise, but given the current uncertain political environment in Egypt and the
fact that the new minister will have larger national issues on his plate, a final
outcome may be over a year away. In a worst-case scenario (JUFO’s being required
to pay EGP300m), this would depress our target price by 8% to EGP4.6.
Litigation over uncompetitive
practices still ongoing…..
…… but could be held in court for
years
-
JUHAYNA FOOD INDUSTRIES (JUFO)
23
Appendix 1: Historical and forecast KPIs
2009A 2010A 2011E 2012F 2013F 2014F 2015F 2016F 5y Average
Dairy
Milk market size ('000 tons) 1,515 1,498 1,641 1,723 1,818 1,918 2,033 2,155
% growth (YoY) 5.1% -1.1% 9.5% 5.0% 5.5% 5.5% 6.0% 6.0% 5.6%
Packaged milk market size ('000 tons) 162 195 214 246 290 346 410 483
% growth (YoY) 13.3% 20.4% 9.7% 15.0% 18.0% 19.0% 18.5% 18.0% 17.7%
Conversion rate (packaged/total) 10.7% 13.0% 13.0% 14.3% 16.0% 18.0% 20.1% 22.4% 18.2%
Milk blended local market share 73% 72.3% 70.5% 70.2% 67.9% 65.8% 64.5% 62.8%
Quantity ('000 tons) 158 171 169 192 219 253 293 337
% growth (YoY) -3.5% 8.5% -1.2% 13.4% 14.0% 15.4% 16.1% 15.0% 14.8%
ASP (EGP) 5,742 6,048 6,700 7,107 7,498 7,723 7,877 7,995
Dairy revenue 907 1,037 1,135 1,365 1,642 1,951 2,311 2,697
Dairy gross margin 31.1% 30.6% 25.8% 25.6% 27.2% 28.6% 29.2% 29.5%
Dairy EBITDA margin 17.7% 17.1% 10.3% 10.1% 11.4% 12.2% 11.8% 11.5%
Yogurt
Packaged yogurt market size ('000 tons) 97 116 156 179 208 246 290 336
% growth (YoY) 32.9% 19.6% 34.5% 15.0% 16.0% 18.0% 18.0% 16.0% 16.6%
Yogurt blended market share 43.5% 37.8% 39.2% 43.1% 44.5% 44.5% 44.2% 44.2%
Quantity ('000 tons) 42 44 61 77 93 109 128 148
% growth (YoY) 34.2% 4.0% 39.5% 26.2% 20.0% 18.0% 17.0% 16.0% 19.4%
ASP (EGP) 8,626 9,151 10,027 9,984 10,383 10,850 11,393 11,962
Yogurt revenue 364 402 614 771 962 1,187 1,458 1,776
Yogurt gross margin 38.1% 36.8% 34.6% 33.4% 33.8% 34.1% 34.6% 34.8%
Yogurt EBITDA margin 19.2% 19.8% 16.9% 16.2% 16.9% 17.3% 17.0% 17.1%
Juices
Packaged milk market size ('000 tons) 217 294 351 404 470 554 654 765
% growth (YoY) 19.2% 35.5% 19.4% 15.0% 16.4% 18.0% 18.0% 17.0% 16.9%
Juice blended local market share 22.6% 22.1% 19.1% 19.8% 19.9% 19.4% 18.6% 18.0%
Quantity ('000 tons) 49 65 67 80 93 108 121 138
% growth (YoY) 1.9% 32.6% 3.2% 18.9% 17.0% 15.0% 13.0% 13.5% 15.5%
ASP (EGP) 5,840 5,904 6,264 6,283 6,396 6,652 6,885 7,091
Juice revenue 287 384 421 502 598 715 836 978
Juice gross margin 33.7% 32.2% 27.0% 26.2% 27.6% 28.5% 29.4% 29.7%
Juice EBITDA margin 18.3% 12.3% 10.4% 9.9% 10.6% 11.3% 11.4% 11.2%
Concentrates
Quantity ('000 tons) 4 6 7 8 9 10 10 11
% growth (YoY) 35.4% 52.0% 19.0% 9.8% 15.0% 10.0% 8.0% 8.0% 10.2%
ASP (EGP) 5,132 6,603 6,409 7,483 7,296 7,405 7,590 7,818
Concentrates revenue 20 39 45 58 64 72 80 89
Concentrates gross margin -18.9% -16.3% 14.6% 14.0% 14.5% 14.8% 15.0% 15.5%
Concentrates EBITDA margin -38.4% -30.1% 12.2% 12.0% 13.0% 13.6% 14.0% 14.2%
Agriculture
Quantity ('000 tons) 0 0 20 51 59 69 81 97
% growth (YoY) - - nm 157.3% 15.0% 16.0% 18.0% 20.0% 45.3%
ASP (EGP) 0 0 0 1,452 729 766 804 844
Agriculture revenue 0 0 0 29 38 45 55 68
Agriculture gross margin - - 34.6% 25.8% 30.8% 31.9% 32.6% 33.2%
Agriculture EBITDA margin - - 15.7% 7.2% 12.8% 15.9% 16.1% 16.2%
Overall revenue 1,578 1,861 2,215 2,725 3,304 3,971 4,740 5,608
% growth (YoY) 7.9% 18.0% 19.0% 23.0% 21.3% 20.2% 19.4% 18.3%
Overall gross margin 32.5% 31.3% 28.3% 27.6% 29.0% 30.0% 30.7% 31.0%
Overall EBITDA margin 24.9% 23.1% 18.8% 45.4% 19.7% 20.0% 19.3% 18.7%
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24
Appendix 2: JUFO’s summary financials
Income statement (EGPm) 2010A 2011A 2012F 2013F 2014F 2015F
Revenue 1,875 2,251 2,742 3,322 3,991 4,764
COGS (1,152) (1,470) (1,809) (2,137) (2,541) (3,023)
Gross profit 723 781 932 1,185 1,450 1,740
SG&A (293 (360) (433 (533) (652) (821)
EBITDA 429 421 499 652 798 919
Depreciation and amortisation (126) (139) (169 (215) (245) (271)
EBIT 303 282 331 438 553 649
Net provisions (4) (1) 0 0 0 0
Others 16 (34) (16) (12) (11) (10)
Net finance costs (59) (39) (69) (81) (79) (79)
Net profit before tax 255 209 246 345 464 559
Income taxes (28) (23) (19) (33) (54) (64)
Net profit after tax 228 186 227 313 410 496
Exceptional items 0 0 0 0 0 0
Net profit after exceptional items 228 186 227 313 410 496
Minority interest 0 0 0 0 1 1
Net profit 228 186 227 312 409 494
Basic EPS 0.30 0.20 0.32 0.44 0.58 0.70
Balance sheet (EGPm) 2010A 2011A 2012F 2013F 2014F 2015F
Cash and cash equivalents 724 688 504 469 632 803
Receivables and debtors (net) 300 189 302 300 320 383
Inventory 280 397 410 497 478 570
Other current assets 0 3 0 0 0 0
Total current assets 1,303 1,278 1,216 1,266 1,430 1,757
Fixed assets (net) 1,151 1,329 1,974 2,205 2,342 2,393
Projects under construction 138 214 150 105 73 51
Intangible assets 97 97 97 97 97 97
Other long-term assets 39 43 43 43 43 43
Total assets 2,728 2,961 3,481 3,716 3,985 4,342
Short-term debt 377 647 629 732 710 806
Trade payables and creditors 217 149 181 299 330 393
Other current liabilities 29 20 20 20 20 20
Total current liabilities 623 816 831 1,052 1,061 1,220
Long-term debt 384 252 530 404 500 500
Other non-current liabilities 77 81 81 81 81 81
Total non-current liabilities 461 334 611 485 581 581
Shareholders' equity 1,643 1,812 2,039 2,180 2,344 2,544
Minority interest 0 0 0 0 -1 -3
Total liabs. and shareholders' equity 2,728 2,961 3,481 3,716 3,985 4,342
Cash flow statement (EGPm) 2010A 2011A 2012F 2013F 2014F 2015F
NOPLAT 354 325 396 527 654 766
Non-cash items 38 19 0 0 0 0
Gross cash flow 392 343 396 527 654 766
Change in operating working capital -77 -165 -93 33 30 -93
Operating FCF 315 178 303 560 685 673
Capital expenditure -288 -404 -750 -400 -350 -300
Change in projects under construction - - - - - -
Change in other assets (net) - - - - - -
Free cash flow 27 (226) (447) 160 335 373
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JUHAYNA FOOD INDUSTRIES (JUFO)
25
Key ratios and indicators 2010A 2011A 2012F 2013F 2014F 2015F
Profitability ratios
Revenue growth (%) 17.3 20.0 21.8 21.2 20.1 19.4
Gross margin (%) 38.5 34.7 34.0 35.7 36.3 36.5
EBITDA margin (%) 22.9 18.7 18.2 19.6 20.0 19.3
Net margin (%) 12.1 8.3 8.3 9.4 10.2 10.4
EPSG (%) (57.8) (32.4) 58.6 37.6 31.2 20.9
ROAE (%) 20.5 10.8 11.8 14.8 18.1 20.2
Liquidity ratios
Current ratio (x) 2.1 1.6 1.5 1.2 1.3 1.4
Quick ratio (x) 1.6 1.1 1.0 0.7 0.9 1.0
Efficiency ratios
Receivables DOH (days) 46 40 33 33 28 27
Inventory DOH (days) 80 84 81 77 70 63
Payables DOH (days) 63 45 33 41 45 44
Cash conversion cycle (days) 63 78 81 70 53 47
Debt ratios
Net debt/Equity (x) 0.02 0.12 0.32 0.31 0.25 0.20
Net debt/EBITDA (x) 1.17 0.29 0.87 1.01 0.78 0.59
Interest coverage ratio (x) 5.1 7.3 4.8 5.4 7.0 8.2
Other key ratios
PE (x) 14.2 21.0 13.2 9.6 7.3 6.1
PB (x) 1.6 1.7 1.5 1.4 1.3 1.2
EV/EBITDA (x) 7.7 7.8 6.6 5.0 4.1 3.6
P/CFPS (x) 6.7 8.8 7.6 5.7 4.6 3.9
PEG (x) - - 0.3 0.3 0.3 0.3
Dividend payout ratio (%) 0 74 0 55 60 60
Dividend yield (%) nm 3.5 nm 6.5 9.3 11.3
Financial summary
JUFO currently has EGP928m of total debt and EGP643m of cash on its balance
sheet: a net debt of EGP285m. Total debt is forecast to rise to EGP1.2bn by year-end
2012.
Its net debt/equity ratio is estimated at 0.32x in 2012, up from 0.12x in 2011, post
signing a loan contract with the Commercial International Bank (CIB) totalling
EGP300m, to be used partially to finance the construction, building, production, and
filling lines of its new yoghurt plant “Egyfood”.
It spent EGP400m in capex in 2011 and has assigned EGP750m in 2012 for
rebuilding its yoghurt plant, continuing its backward integration programme, and
expanding its distribution network.
The company’s average effective tax rate has been just 7% over the past three years,
as it enjoys a tax holiday on the production of some of its factories; this will be
terminated by 2018.
In 2011, JUFO started paying dividends for the first time, with a payout ratio of 57%,
despite declaring in its IPO prospectus that it did not expect to pay dividends in
2010 and 2011. Given this statement and the capex demands this year, we assume
that it will not pay dividends in 2012, but will resume doing so in 2013 with a payout
ratio of 55%.
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26
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