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Egypt Consumer - 2Q17: Pockets of positivity, but volume and margin recovery still taking time

Egypt consumer names’ 2Q17 results painted a slightly better picture for demand on improved Q-o-Q volumes as consumers are slowly adapting to inflationary pressure, but margins remain depressed (four had lower earnings Y-o-Y). Our Egypt top picks remain Eastern Co. (EC), Juhayna & Oriental Weavers. Below we summarise the key trends:
Food volume growth on the mend, competition still fierce

Food companies reported entirely price-driven top-line growth (+27% on avg.), as volumes remained under pressure. The pace of Y-o-Y revenue growth slowed vs.1Q17 for most as competition intensified and promotions drove down avg. prices (raised c50-100% Y-o-Y). However, a sequential improvement in volumes (except Edita – flat volumes) signals that 1Q17 was likely the bottom with a pick-up expected as the year progresses, particularly as pricing should only see limited increases (+3-6% to pass on higher interest costs, etc.). Obour Land’s (uncovered) top-line growth was the strongest, up 43% Y-o-Y, followed by Juhayna (+18% Y-o-Y, volumes fell c15-20%) and Domty rose c17%, but volumes fell more drastically as the company sought to control volumes to accelerate the phase out of third-party agents. Edita’s revenue growth was the weakest (+11%) as croissant volumes were still hard hit, but also Ramadan (more days this year than 2Q16) is a weak consumption month for snacks.
OW & EC safe havens, GB plagued by debt & bad market

OW’s revenue growth was the strongest in our Egypt consumer coverage up 54% Y-o-Y as it is a key beneficiary of EGP devaluation due to its export exposure (c60% of top-line) and solid local growth (price-driven) – earnings growth was also robust at 28% Y--Y. EC’s active pricing strategy lifted its own-brand revenues 38% Y-o-Y, while under-licence revenue grew c50% Y-o-Y on USD translation impact; headline earnings were flat Y-o-Y (no financials yet), but likely included a one off as headline gross profit surged 100% Y-o-Y (gross margin +11pp). GB Auto faced harsher demand conditions with car volumes -55% in line with the market on affordability issues, and earnings were in the red due to a highly leveraged balance sheet and interest rate hikes.  
Margin focus to take center stage

For Domty and Juhayna, gross margin contraction eased, but Edita’s margins could not  escape the impact of falling volume. GB Auto’s margins also fell on price promotions to spur demand for cars, while OW’s came under pressure on PP cost hikes and a lower export rebate (cash basis). EC was the exception as margins benefited from cheap tobacco inventory and price increases. Cost rationalisation (RM localisation and capex cuts) and operational efficiencies remain at the forefront of companies’ agendas; SG&A controls should help propel earnings recovery once volumes recover

Hatem Alaa, CFA

Nada Amin