• Recurring earnings +14% Y-o-Y, miss on opex; reiterate Buy 1Q16 headline earnings of EGP80.3 million, were up 23% Y-o-Y as revenue growth remained impressive (+27% Y-o-Y) but with margin momentum reversing an expansionary trend for the first time in six quarters mainly on elevated SG&A costs. Excluding one offs (mainly FX gains of cEGP11mn and gain on the sale of investment in Milkes of cEGP5mn), net profit grew 14%, which was 9% below our forecast due to higher-than-expected SG&A costs. We reiterate our Buy rating as we are particularly impressed by the sustained pick-up in revenue growth in the yogurt and juice segments that faced headwinds in 2013-14. The main concern is the spike in SG&A costs to bolster market share that is pressuring margins.
• Impressive revenue growth continues; juice sales surge 62% Revenue growth remained robust up 27% Y-o-Y (mostly volume driven; 3% above EFGe), marking the second quarter in a row of +20% growth after ranging in the mid-teens for the majority of 2015. Growth in the dairy division was decent at 12%, but was significantly outpaced by 62% growth in juice sales on the successful offtake of the revamped product (larger pack sizes, etc.). Also, yogurt grew 17%, solidifying its growth trend; slow yoghurt growth had previously been a concern for us.
• Margins contract mainly on elevated SG&A costs Gross profit (ex. depreciation) increased 25% Y-o-Y in line with our forecast with gross margin narrowing c80bps Y-o-Y to 37.6% (below our 38.6% forecast), signalling waning commodity benefits and a possible negative sales mix impact. We expect the impact of EGP devaluation on gross margin to be more palpable starting 2Q16 but the company will likely raise product prices. SG&A costs growth remained in the +40% range for the third quarter in a row on increased marketing spend and promotions to gain market share, resulting in EBITDA margin contraction of c240bps Y-o-Y to 18.4% (versus EFGe of 19.9%). Accordingly, EBITDA grew 13% Y-o-Y and was 5% below our estimate.

Hatem Alaa, CFA
Nada Amin