Cairo – Mubasher: Juhayna Food Industries has had a "troublesome" year in 2016, and while revenues may have increased on a year-on-year basis, margins suffered, Pharos said in its newest report on the Egyptian company.
Imported raw materials represent around 40% of the company’s revenues, and “management was reluctant to pass on the sudden increase in raw material costs down to the consumers, as they adopted a gradual repricing strategy,” the report released Tuesday indicated.
Pharos upgraded its fair value (FV) on the Egypt-listed food and beverage company to EGP 7.88 from EGP 6.40.
“Another across-the-board price increase of [roughly] 17% is still required to completely offset the full effects of the Egyptian pound devaluation,” the report said, citing Juhayna’s management.
Pharos added that price increases throughout 2017 will boost revenues and improve margins; however, they may hurt volume growth.
“Price-driven revenue growth without volume growth is a risky game,” Pharos stated, noting that Egyptian consumers have become “more price sensitive” especially after the flotation of the local currency, alongside the recent surge in inflation and pressure on disposable income.
Passing increase in costs on to consumers while volume is down is “a risky strategy,” the research firm highlighted, but stated that despite that, this strategy remains a safer option for companies like Juhayna due to the “inelastic nature of their products, especially its dairy segment".
“The problem with this strategy is that market growth will be muted, even in the dairy segment, whose growth depends mainly on the conversion between loose and packaged milk. With a cheaper price point for loose milk, the conversion rate should wane with packaged milk price hikes. As a result, we predict volume growth for the whole dairy segment will be at 4.7% versus a seven-year average of 14.3%,” Pharos said.
