Cairo - Mubasher: Pharos Research initiated their coverage on the stock of Arabian Food Industries Company (Domty) with an “Overweight” recommendation, and a fair value (FV) of EGP 9.87 per share, according to a recent report.
“Despite facing a tough year, outlook remains positive given the relatively inelastic nature of Domty’s products,” the report highlighted.
Raw material imports represent 43% of Domty’s revenues, leaving them with a sizeable FX exposure.
On the back of weaker local currency, 2016 was a tough year for Domty, since margins initially suffered with players’ reluctance to pass on all of the excess costs on one shot to their consumers.
However, gross margins in 2017 are off to a good start, since Domty has raised their average carton pack prices in January by 60% and they are continuing to steadily increase their prices in order to defend their margins.
Pharos expects volume growth to be affected but do not anticipate a decline in volumes in 2017 and going forward; given the essential nature of white cheese in the Egyptian household, being a key source of protein for low income groups, and its cheap price point especially in the current inflationary environment.
“Domty’s marginal defense strategy might backfire though. If local currency continues to plummet, the company might find it difficult to increase prices and hence might be forced to take a hit on margins,” the report indicated.
“It is looking very likely that global milk powder prices will start rallying up by 2018. If that is the case and the Egyptian Pound does not stabilize, the dairy industry will be at a disadvantage.”
The competitive landscape in the Egyptian food and beverage industry is proving to be very fierce given the lucrative nature of the industry and the continued investments made by competing companies which might drive Domty to increase their advertising expenses as well as halt potential price increases to defend market share.
