• Fast-growing, leading cheese producer at large discount to peer; Buy We initiate coverage on Domty, Egypt’s largest white cheese producer (c41% market share), with a Buy rating and a FV of EGP14.3/share (66% upside; EGP12.65 post the listing of capital increase shares). The stock trades at 2016e P/E of c14x, below peer’ average of 21x despite Domty’s stronger growth prospects (2016-17e earnings CAGR of 31% versus peers’ 12%) and an impressive return profile (sustainable RoAE of 30%+). A planned EGP300mn capital injection from the recent IPO proceeds should expedite growth via new initiatives and distribution investments, while improving the balance sheet through better working capital management and lower leverage (2015 net debt/equity of c2.1x).
• Expansions to drive c17% revenue CAGR; diversification in the works Domty aims to raise capacity c38% in 2016e, with four carton pack cheese lines (66% of 2015 revenue, c43% market share) and one for juice (c16%, c7%). Domty positioned white cheese as an on-the-go snack, pioneering smaller SKUs (65-125g; EGP1-2/pack; c17% of revenue) that we expect to be the focus of future capacity additions. After successfully venturing into juice (no. 5 player in only two years in a competitive market), Domty is looking to launch two new products: i) cheese sandwich (2H16; c3% of 2020e revenue), its first direct venture into snacks; and ii) hard cheese (1Q17; c4%) aiming to become the first local player to offer branded products in the cheese market’s largest segment.
• FX risk manageable given low input cost environment, flexible pricing While Domty is exposed to EGP devaluation risk as nearly half of raw material costs (c79% of cash costs) are imported, we do not have concerns in the short term, given: i) low input costs (especially for SMP, c21% of net direct material costs); ii) a generally flexible pricing environment (looking to raise prices 10-11% in April-May 2016 due to the c13% EGP weakness in March); and iii) exports (c7% of revenue) that cover over 20% of FX needs.
• Focus on increasing direct distribution to improve cash flows Given its status as the largest Tetra Pak white cheese producer globally, Domty receives a number of benefits including discounts (c20% of purchases) and flexible machine payment terms (four-year interest-free instalments; no real cash outflow, netted against discounts due). However, FCF generation has been weak, mainly due to long receivable collection periods, which should improve as direct retail reach is raised to c60% of local sales in 2-3 years from c39% now through growing its own distribution fleet (bodes well for margins).

Hatem Alaa, CFA
Nada Amin