• Food producers underperform as FX sourcing shifts to parallel market We expect continued weak share price performance for Egypt food names until they implement their strategy of upping prices to gradually restore margins (our numbers assume a return to 2015 earnings levels in 2017e). Food producers were granted priority FX sourcing from banks since 2011, which made them largely unaffected by the parallel market rate. In the past few months, they have become increasingly reliant on the parallel market as recent FX auctions were directed to pharmaceuticals; hence, the cost of imported components jumped c55% (c13% March 2016 devaluation + c40% black market premium). Additionally, most locally-sourced inputs are seeing similar increases as they have an FX component.
• Dairy names offer good value, assuming earnings normalisation Edita (Neutral, FV EGP11.8) has the lowest FX needs and is raising prices via launching higher-priced new products; however, this is already reflected in its valuation premium (c22x 2017e P/E). Also, its 2016e numbers are impaired by the upsizing of ‘Twinkies’ (2x price), which makes replicating the same strategy with other products difficult in our view. We are Buyers of both dairy names Juhayna (FV EGP7.00) and Domty (FV EGP10.20) as they offer good value (c16-17x 2017e P/E) after recent underperformance. However, our 2017e numbers assume some margin restoration, which is not without risk, as companies will need to raise prices over 20% this year. The only similar recent precedent was a large hike in yogurt prices in mid-2013 that killed market momentum for nearly two years. Worth noting is that price increases implemented thus far (c10%) are seeing good acceptance from consumers, but the sustainability of these trends is not guaranteed.
• Discretionary names better-positioned; OW is our top pick While discretionary items are seeing more substantial price hikes (over 30% for cars), we are not as concerned as parallel market sourcing has been the norm with consumers accepting large price jumps. This explains why GB Auto (Buy, FV EGP3.80) is performing strongly despite its high FX exposure on market share gains (better ability to import, new models). Oriental Weavers (Buy, FV11.30) is our top Egypt consumer pick, given its export exposure (cover all FX needs); we believe it will return to benefit from devaluation as competition is easing in export markets (in 2015, it passed on the bulk of FX- and low-PP-cost benefits to foreign clients).
• Will an impending official devaluation actually matter? The fact that companies are now sourcing from the parallel market makes an official rate devaluation a non-event, in our view. It will only result in FX losses on liabilities repricing (Juhayna is the exception). Devaluation could be positive for food names if they are able to source from banks again. The worst case scenario is one where FX availability does not improve, and the black market rate devalues further, as this could require further price hikes.

Hatem Alaa, CFA
Nada Amin
Mirna Maher