• Trim FV, but remain Buyers on strong ST earnings outlook, valuation We lower our FV 14% to EGP9.5/share (36% upside), as we raise our cost of equity c1pp and lower earnings estimates c18% on average to reflect higher SG&A costs and taxes (the latter on deferred tax charges through 2017 related to the new yogurt plant). We remain Buyers of Juhayna, as we expect strong recurring earnings growth (2016-17 CAGR of 24%), driven by improved revenue growth and favourable input costs. At c18x 2016 earnings, the stock is trading at c10% discount to global dairy peers despite stronger growth prospects.
• Demand dynamics generally positive, especially for yogurt and juice Yogurt (25% of 2015 sales) continues its recovery (+28% Y-o-Y in 4Q15) on improved market volumes (+9% in 9M15 versus flat to declining in 2013-14) and market share gains. Juice (20% of sales) remained impressive (+36% in 3Q15, +55% in 4Q15), driven by downgrading the nectar range to drink (lower fruit content), enhancing formulation and upsizing the 200ml SKUs to 235ml since June 2015 (price unchanged). A similar upsizing took place in 2016 for smaller SKUs of its premium range, ‘Pure’. The Arla JV started sales in Nov. 2015, and we expect revenue of EGP175mn in 2016 (c3% of total; imported cheese & butter distributed via Juhayna). Real potential will be realised with the start of cheese production initially at Juhayna’s facilities and then at a standalone plant (not reflected in our numbers), with the company planning for cheese to represent c20% of revenue in five years.
• Vertical integration underway; devaluation, SG&A costs margin risks Vertical integration plans are progressing: Juhayna has a milking cow herd of c900 that should reach c4k by year-end supplying c10-12% of its raw milk needs (now relies on c120 third-party farms for raw milk). We expect that the company may launch a second phase of the farm by 2018 (can take up to 16k cows). Our gross margin assumptions are conservative (flattish in 2016e), given low commodity prices, but we opt to remain so, in view of EGP devaluation risk. However, the situation is slightly better than previous years due to the low raw material prices. Price increases may take place (last was in June 2014) to offset FX risk (<5% higher prices for c10%+ devaluation). However, SG&A costs are likely to remain high, given intense competition, with low input costs enticing key players to increase marketing and promotional activities.

Hatem Alaa, CFA
Nada Amin