• Earnings growth deflated by 1Q15 provision reversals; reiterate Buy Domty posted 1Q16 net income of EGP24.1mn, up 7% Y-o-Y, as solid top-line growth and gross margin gains were offset by a 58% surge in SG&A expenses (this trend was roughly expected in 2016). Y-o-Y earnings growth was deflated by receivable provision reversals of EGP5mn booked in 1Q15 (booked in SG&A costs) that were not repeated in 1Q16. Excluding these provisions and FX losses (little changed Y-o-Y at EGP3.6mn), earnings would have been up a stronger 21% Y-o-Y. We remain buyers of Domty as we expect bottom-line momentum to improve as the year progresses given that: i) we expect marketing and advertising spending will be somewhat front-loaded (in earlier parts of the year); ii) there are few headwinds to materialising commodity benefits (given that SMP prices remain low); iii) recent price increases in cheese should offset pressures associated with the recent EGP devaluation; and iv) 1Q is typically a seasonally weak quarter.  Also, valuation is undemanding at a 2016e P/E of 15x, which is at a steep discount to global dairy peers (c21x).
• Cheese segment drives top-line, gross margin gains Revenue growth was strong at c20% Y-o-Y, entirely driven by the cheese segment (87% of total revenue) which increased c25% Y-o-Y (volume driven, +29% Y-o-Y). Meanwhile, juice sales (c13% of total revenue) slumped c6% (volumes -6%) on competitive pressure but should improve on new packaging and capacity in 2H16. Gross margin continued to strongly expand (+c160bps Y-o-Y to 26.2%; gross profit +28%) mostly on low skimmed milk powder prices (the largest input cost other than packaging); the cheese gross margin widened c280bps Y-o-Y, while juice margins narrowed a significant c7pp.  
• EBITDA growth muffled by SG&A jump EBITDA growth was far tamer, at only 7% Y-o-Y with EBITDA margin narrowing c170bps to 14.7% mainly on an increase in SG&A expenses that stemmed mostly from advertising and marketing costs (c23% of total SG&A, grew 61% Y-o-Y) as well as the aforementioned receivable provision reversals. We expect a jump in SG&A costs for 2016 (+37% Y-o-Y) on increased advertising to coincide with the IPO and to support new product launches (cheese sandwich, etc.) as well as higher salaries.

Hatem Alaa, CFA
Nada Amin