Delta Sugar Co. - Initiation of Coverage - 12 November 2015

Target Price Market Price Investment Grade Recommendation Upside Potential

9.53 10.21 Value Sell -7%

Prime Research 1

Sugar is considered a strategic good over the world. Sugar production depends on the crops of sugar cane and sugar beets. In 2015, sugar cane and sugar beets accounted for 80% and 20% respectively of the world’s sugar produc-tion.

Developing countries are ahead of the developed countries in both consumption

and production. Brazil and India are the world’s top sugar producers, while on the other hand, India and the EU are the world’s top sugar consumers. The USDA predicts that the global sugar production will decline in MY2015/2016 reaching 173.4 MMT, while consumption is expected to increase in MY2015/2016 reaching 173.4 MMT. The global sugar market is known for its low prices and high volatility. Since 2013, sugar prices (and many other commodities) started to decline on the back of excess supply and high inventory levels . Even though production is expected to decline, yet prices are expected to keep declining in the short term. Egypt consumes around 3 MMT of sugar a year, yet it produces around 2 MMT, (sufficiency ration c70%). Egypt depends on imports, mainly from Brazil (c90% of imports) to fulfill the gap. The local industry has been suffering deeply since 2013 as a result of the international prices reaching levels that are lower than the domestic prices. This has led to unfair competition between local and inter-national producers, where the local inventory levels reached 900,000 Tons. The government of Egypt has intervened in the sugar industry in order to pro-tect and stabilize the industry conditions. In April 2015, the government (MoFTI) announced that it will apply a 20% tariff on “imported refined sugar” with a minimum tariff of EGP700/ton. It was announced in November 2015 that the government is planning to pass legislative amendments raising import tariffs on five categories of consumer goods, including “raw sugar”, certain types of ready-made clothes and furniture. The additional tariff is expected to have the range of 5-40% , yet we expect that the tariff on raw sugar would be around 20% as the tariff for the imported refined sugar). The amendments have re-portedly been approved by Cabinet and are awaiting the sign-off from Ittihadiya.

Stock Performance Chart (EGP/ Share)

Delta Sugar (SUGR.CA) Egypt | Food & Beverage

Initiation of Coverage November 12, 2015

SUGR.CA / SUGR.EY

Sector Food & Beverage

Company Traded Market EGX

Report Reason Initiation of Cover-

age

Stock Currency EGP

Exchange Rate EGP7.83/USD

Market Cap (EGP million) 1,452

Outstanding Shares (million) 142

Par Value/Share (EGP) 5

Price Low – High (EGP) 9.5—16.8

Av. Daily Traded Volume (000)

6.9

Source: Bloomberg

Shareholders Ownership Stake

Egyptian Sugar and Integrated Industries Company - SIIC

55.73%

Misr Life Insurance 8.64%

Misr Insurance 8.26%

Al Awqaf Egyptian Authority 8.09%

Egyptian Chemical Industries 6.46%

National Investment Bank 6.27%

Free Float 6.55%

Global Sugar Market

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Production. - 1000MT Consumption - 1000MT Ending Stock - 1000MT

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Prime Research 2

It is expected that the poor conditions of the local industry would persist in 4Q 2015. The application of both tariffs - on refined and raw sugar - will gradually improve the local industry in 2016, leading to the decline of inventory levels by around 40% . Delta Sugar Company (DSC) has one of the country’s largest market shares of sugar production from sugar beets. DSC has a market share of around 15% of total sugar produced from sugar beets and around 10% from the total sugar market. The company has only one factory in Kafr El Sheikh Governorate with 2 production lines with an annual production of around 250,000 tons of sugar, 100,000 tons of animal feed and 100,000 tons of molasses.

The production/processing season of sugar and the other by-products starts in February and ends in June. From July to De-cember (off-season), DSC refines imported raw sugar. The cost of sugar beets represented c94% (2011- 2014) of the raw materi-als’ costs and c78% (2011 – 2014) of total COGS. The purchase of sugar beets is financed through short-term debt and is repaid before the end of the year (short-terms OVDs).

The entire sugar production is usually consumed domestically; however, the majority of the by-products - molasses and animal feed - is exported to several countries, mainly in Europe. Almost 79% of DSC’s revenue comes from Sugar, while animal feed and mo-lasses have quiet smaller yet shares – 13% and 8% respectively.

We believe the major risks that the company faces; It does not own any agricultural land. DSC failed several times in the past to

undergo any expansion plans and to build a new factory. In addition, it was unable to initiate any ethanol production facilities in the

past and it has not declared any future plans about it.

Using the DCF Valuation method, based on a WACC Rate of 14.38% and a Perpetual Growth Rate of 3%, our valuation led to a value of EGP9.53 Per Share implying a downside risk of 7% (based on 11/11/2015 closing price of EGP10.21). Ac-cordingly we assign a “Sell” recommendation for Delta Sugar Company (SUGR.CA).

Although a downside risk of only 7%, we opted to recommend “Sell” for SUGR.CA, due to the high risks that the industry is facing in the short-term.

Source: Delta Sugar & Prime Estimates

Fiscal Year 2013a 2014a 2015e 2016f 2017f

Revenue (EGP mn) 1,530 1,372 1,083 1,409 1,653

Growth 56% -10% -21% 30% 17%

EBITDA margin 17% 21% 2% 8% 17%

Net Income (EGP mn) 189 198 -26 31 174

Net Attr. Income (EGP mn) 171 179 -24 28 157

EPS (EGP) 1.3 1.4 -0.2 0.2 1.2

EPS Growth -19.4% 4.6% -113.4% -217.6% 459.7%

DPS (EGP) 1.2 1.0 0 0.2 1.0

BVPS (EGP) 8.2 8.4 6.9 7.3 8.3

P/E x 7.68 7.34 -54.91 46.68 8.34

Dividend Yield 11% 10% 0% 2% 10%

P/BV x 1.24 1.22 1.48 1.40 1.23

Fi-

nancial Highlights 2013a

No. Company Name



Prime Research 3

TABLE OF CONTENTS

Content Page

1. International Sugar Market - Overview 4

1.1. Introduction 4

1.2. Production Process 4

1.3. Sugar By-Products & Their Usage 5

1.4. Alternative Use of “Sugar Cane / Sugar Beets” – “Ethanol” 6

1.5 Production 7

1.6. Consumption 9

1.6.1. Consumption per Capita 9

1.7. Closing Balances 10

1.8. Exports 11

1.9. Imports 12

1.10. Prices 12

2. Local Sugar Industry - Overview 14

2.1 Production 14

2.2. Consumption 16

2.3. Trade 16

2.4. Closing Balance 17

3. Delta Sugar Company S.A.E. - Overview 18

3.1. Operational Overview 18

3.1.1. Product Mix 18

3.1.2 Sales 19

3.1.3. Sugar Beets 20

3.1.4 Pricing 21

3.1.5. Inventory 23

3.2. Managerial Risks / Weaknesses: 24

3.3. Delta Sugar’s Performance in 9M 2015: 25

3.4. Profitability Ratios’ Analysis 27

3.5. Valuation 29

- List of Abbreviations 32



Prime Research 4

1. International Sugar Market - Overview

1.1 Introduction:

Sugar is considered among the most important and strategic commodities around the globe. More than 170 MMT of sugar is pro-

duced each year from millions of farms and plantations in almost 120 countries around the world. The international sugar market is

mainly characterized by low and volatile market prices. Sugar prices are susceptible to any change in the international supply and

demand where almost 60% of the world’s sugar production is dominated by only 5 countries. In addition to sugar’s low and volatile

prices, sugar producers in developing countries must compete with other developed countries that have larger financial resources,

have access to more developed technologies and have greater political control to subsidize numerous staple commodities and sup-

port their sugar industries.

Sugars exist in the tissues of most plants; however they are present in adequate quantities for efficient extraction only in “Sugar

Cane” and “Sugar Beets”. Sugar Cane can be only produced in tropical and sub-tropical areas and it typically consumes massive

amounts of irrigation water, where sugar beets grow in colder temperate zones with adequate rainfall and fertile soils. In 2015,

sugar cane and sugar beets accounted for 80% and 20% respectively of the world’s sugar production.

1.2. Production Process:

The production process of sugar from either sugar cane or sugar beets is compromised of 5 steps:

Extraction:

The extraction of the sugar-filled juice from sugar beets or sugar cane. This step is much easier for sugar cane. Sugar cane is

rich in moisture and as soon as it is crushed and sliced, the sucrose-filled juice starts released. On the other hand, in order to

release the sucrose from the sugar beets, the beets have to be thoroughly washed, sliced then put into hot water diffusers. The

resulting pulp from the diffuser is used as livestock feed.

Carbonization:

The addition of limestone and carbon dioxide to the juice to be able to extract the non-sugar impurities.

Evaporation & Concentration:

Around two-thirds of the water is removed through “evaporators” from the juice so it becomes extremely concentrated.

Crystallization:

The thick mixture continues to be heated as sugar dust (crystals) is added until crystallization is achieved.

Separation:

The mix is then placed in spinning machines called “centrifugals” in order to separate the raw sugar crystals from the dark liquid

molasses.



Prime Research 5

1.3. Sugar By-Products & Their Usage:

The main by-products of sugar are Molasses, Beet Pulp, Bagasse Fiber and Cane Wax:

Molasses: is a by-product of the refining of sugar cane and sugar beets into sugar. It is a dark viscous fluid that remains

after the maximum extraction of sugar and it is used in either the manufacturing of ethanol for industry or as an ingredient in

cattle feed. Unlike refined sugars, Sugar cane molasses contain massive amounts of vitamins and minerals and hence it can

be used a health supplement (for humans). On the other hand, sugar beets molasses lack such nutrients and consequently it

is used only for either ethanol production or as cattle feed.

Beet Pulp: is a by-product from the processing of sugar beets only and is usually used as Animal Feed (fodder for horses and

other livestock) as it is high in energy and fiber.

Bagasse Fiber: is a by-product from the processing of sugar cane only and it is a fibrous material that remains after the

sugar cane is crushed to extract its juice. It is used as a bio-fuel and in the paper manufacturing industry as well.

Cane Wax: is a wax extracted from sugar cane only. It is used in several industries, such as food, leather, plastics, cosmet-

ics, paints and printing.



Prime Research 6

1.4. Alternative Use of “Sugar Canes/Sugar Beets” – “Ethanol”:

Sugarcane ethanol is an alcohol-based fuel produced by the fermentation of sugarcane juice and molasses. Ethanol can be pro-

duced through sugar beets as well, however sugar cane is used much more in ethanol production. Due to its cleanliness, afforda-

bility and being a low-carbon bio-fuel, sugarcane ethanol has emerged as a leading renewable fuel for the transportation sector.

Ethanol can be used two ways: 1) Blended with gasoline and 2) Pure Ethanol. Many benefits arise from using ethanol, such as

cleaner air, reduced greenhouse gas emissions, better performance and lower petroleum usage. Brazil and the U.S. lead the indus-

trial production of ethanol fuel – around 80% of the world’s production in 2010. Brazil (the world’s top sugar producer) is the

world’s top country that is concerned with having a sustainable bio-fuel economy and it is considered a bio-fuel industry leader. To

a large extent, the successful Brazilian ethanol model is quiet successful due to its advanced agri-business technology and its huge

available amounts of arable land. The tendency of using sugar cane/sugar beets in ethanol production will definitely have an effect

on the pricing of sugar globally. Many mills have the ability to switch between producing sugar and producing bio-ethanol, so deci-

sions regarding whether to produce either sugar or bio-ethanol are mainly driven by changes in relative profitability between the

two products and/or by any government intervention/controls. This flexibility assures the availability of sugar and sugar exports,

when relative prices relatively favor sugar over ethanol.

Ethanol prices and crude oil prices have been found to be highly correlated together as the figure below shows. Since the beginning

of 2014, oil prices have dropped severely, reaching USD47.23/barrel in Sep., representing a drop of 56% over the 21-months pe-

riod (Jan.14 – Sep.15). Ethanol prices declined in the same period, reaching USD1.61/gallon, however at a less steep rate (23%

drop in Jan. 14 – Sep. 15). It is expected that the allocation of sugar cane or sugar beets to the production of ethanol will rise,

however not in a fast rate, as a result of the declining prices and consequently weaker profitability margins which will not encour-

age either switching production to ethanol or further investments in the bio-fuels industry in the coming period. On the back of the

above mentioned reasoning, the allocation of sugar cane / sugar beets to ethanol production will not have a major effect on the

pricing of sugar.

Source: Index Mundi & USDA

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Prime Research 7

1.5. Production:

As previously mentioned, 120 countries around the world produce sugar, where global production was slightly above 170 million

metric tons (MMT) in marketing year (MY) 2014/2015. Approximately 80% is produced from sugar cane and 20% from sugar

beets. 70 countries produce sugar from sugar cane, 40 from sugar beet and 10 from both.

The Top 5 Centrifugal Sugar Producers as of MY2014/2015 (Actual) and MY2015/2016 (Estimated) are as follows:

Source: USDA – Foreign Agricultural Services – May 2015

The country ranking for sugar production has not witnessed any changes for Brazil, India and the EU since MY2010/2011, how-

ever, China has been ahead of Thailand since MY2010/2011 till MY2014/2015 but it is expected that Thailand will take the lead

and take the 4th place as of MY2015/2016. There have been some slight annual changes in the production quantities across coun-

tries.

Since MY2013/2014, global sugar production has witnessed slight declines as a result of a slowdown in the expansion rate in

processing capacities in recent years as the sugar industry is a capital-intensive industry with a very high level of fixed assets.

Investments are expected to take place in the coming few years; however additional production is expected to come from higher

yields more than additional production capacities.


World Sugar production is expected to decrease by 0.5% in MY2015/2016 to reach 173.4 MMT, as compared to 174.3 MMT in MY2014/2015.

Accordingly, the world’s sugar production is estimated to witness a CAGR of 1% over the period MY2010/2011 till MY2015/2016.

Production (1,000 MT)

MY 2014/2015 (A) % MY 2015/2016 (E) %

1) Brazil 35,850 21% 36,000 21%

2) India 29,483 17% 29,050 17%

3) EU 16,750 10% 15,500 9%

4) Thailand 10,970 6% 11,400 7%

5) China 11,000 6% 10,820 6%

World 174,308 100% 173,405 100%

17) Egypt* 2,067 1% 2,125 1%

162,219

172,359

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Global Sugar Production1,000MT



Prime Research 8


Some countries specialize in sugar production using either sugar cane or sugar beet depending on their climatic and soil conditions,

while other countries are able make use of both methods. Research over the last years showed that sugar from sugar beets is more

efficient than from sugar from sugar cane, taking into consideration the scarcity of land and water resources.

Source: Index Mundi

Going forward, sugar crops (cane and beets) in many parts around the world are expected to develop and increase due to the rise in

demand for sugar and its other uses, where world sugar production is expected to slightly cross 200 MMT (Est. 204 MMT – OECD-

FAO Agri. Outlook 2014-2023) in MY 2020/2021. Majority of the additional production will come mainly from the developing coun-

tries (developing countries’ share of global sugar production would be 79% versus only 21% for the developed countries in 2023);

namely Brazil and India, which mainly produce sugar through sugar cane rather than sugar beets. It is expected that sugar cane will

account for almost 86% of the total sugar output in 2023; as almost the total increase in output would come from sugar cane and

only a minimal amount would come from sugar beets. Russia and the EU are expected to raise their sugar production from sugar

beets as the EU will have the sugar beets production quota removed in 2017. Latin America, Asia (China & Thailand) and Africa (Sub

-Saharan countries and Egypt) will witness major expansions in their sugar production industries. Another factor affecting the global

sugar production is the allocation of sugar cane and sugar beets to bio-ethanol production and its usage as petrol-substitute or pet-

rol-complement. It is expected that the share of sugar cane allocated to produce bio-ethanol will increase as 28% of sugar cane will

be used in sugar production by 2023; however only 5% of sugar beets will be used to produce bio-ethanol at the same year.

Sugar Production - Sugar Cane - (1,000 MT) - Est. 2015*

Sugar Production - Sugar Beet - (1,000 MT) - Est. 2015*

Country Prod. % Country Prod. %

1) Brazil 35,800 26% 1) EU 16,025 47%

2) India 27,250 20% 2) U.S. 4,418 13%

3) China 12,450 9% 3) Russia 4,200 12%

4) Thailand 10,200 7% 4) Turkey 2,400 7%

5) Mexico 6,508 5% 5) Ukraine 1,600 5%

World 138,136 100% World 34,227 100%

18) Egypt* 920 1% 6) Egypt* 1,130 3%

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Global Sugar Production1,000MT



Prime Research 9

1.6. Consumption:

Today, a world population of 7.2 billion people, of which 76% (5.5 billion) are concentrated in Asia (4.4 billion) and Africa (1.1 bil-

lion), consumes roughly 171 million tons (MY2014/2015), that is c24 kg/capita on average.

The Top 5 Countries with the highest human domestic consumption for Centrifugal Sugar as of MY2014/2015 (Actual) and

MY2015/2016 (Estimated) are as follows:


The 10 largest sugar consuming countries represent almost two-thirds (64% - MY2014/2015) of the total global sugar consumption.

In developed countries, sugar consumption can be viewed as saturated with low potential for growth as their populations are wit-

nessing slow growth and they are ageing populations and above all that, they have higher levels of health consciousness and they

persue health-oriented dietary changes. On the other hand, developing countries are considered growing markets; especially Asia

followed by the Middle East and then Africa. Populations in developing countries are increasing rapidly and the per-capita income has

been increasing for the last several years and consequently, it is expected that their consumption of staple foods will increase and

their diets will become more diversified.

1.6.1. Sugar Consumption - Per Capita:

From the per capita perspective, the country ranking would change to a large extent. According to the OECD-FAO Agri. Outlook 2014

-2023, the Annual Sugar Per Capita Consumption for 2014 (Est.) and 2020 (Est.) are as follows:

Consumption (1,000MT)

MY 2014/2015 (A)

% MY 2015/2016

(E) %

1) India 27,000 16% 28,000 16%

2) EU 18,700 11% 18,800 11%

3) China 17,400 10% 17,700 10%

4) Brazil 11,300 7% 11,400 7%

5) U.S. 10,758 6% 10,873 6%

World 170,600 100% 173,413 100%

10) Egypt* 2,930 2% 3,000 2%

Continent 2014 2020 Level Of Development

2014 2020

Latin America 49.5 51.0 Developed 35.7 36.1 Oceana (Australia / New Zealand) 46.5 46.2 Developing 22.2 23.9

Europe 39.2 39.1 Least Developed 11.3 12.4

North America 34.2 34.2 World 24.8 26.1

Asia 19.7 21.7 . . .

Africa 16.1 17.1

World 24.8 26.1



Prime Research 10

Country 2014 2020

1) Brazil 69.4 73.5

19) EU 38.1 37.0

11) Egypt 41.7 46.5

23) U.S. 33.6 33.8

29) India 21.3 22.8

33) China 12.1 14.1

World 24.8 26.1

Global consumption for MY2015/2016 is forecasted at a record of 173.4 MMT, almost equaling production which is forecasted to

decline for the third consecutive year to reach 173.4 MMT.


As previously mentioned, the leading driver of increasing global consumption will be Asia, where its consumption is expected to cross

90 MMT by MY2020/2021. Africa on the other hand is expected to show the greatest upward trend where it is estimated to grow at

an annual rate of around 3.5% till MY2020/2021.

1.7. Closing Balances:

The table below shows the top ranking for countries with respect to the closing balances for Centrifugal Sugar in MY2014/2015

(Actual) and for MY2015/2016 (Expected).


Closing Balances

(1,000MT)

MY 2014/2015

(A) %

MY 2015/2016

(E) %

1) India 10,210 23% 9,960 25%

2) Thailand 5,724 13% 6,224 15%

3) China 7,187 16% 5,762 14%

4) U.S. 1,458 3% 1,403 3%

5) EU 2,617 6% 1,017 3%

World 44,281 100% 40,529 100%

25) Egypt* 278 1% 253 1%

Source: OECD-FAO Agricultural Outlook 2014-2023

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Production. - 1000MT Consumption - 1000MT Ending Stock - 1000MT



Prime Research 11

Over MY 2015/2016, the global ending stock for Centrifugal Sugar is expected to drop by 3.8 MMT to reach 40.5 MMT. Ending

stocks have risen over the last several years as it stood at 30 MMT in MY2010/2011 and reached 44 MMT in MY 2014/2015, repre-

senting a 4-year CAGR of 11%.

1.8. Exports:

The table below shows the major exporting countries for Centrifugal Sugar worldwide in MY 2014/2015 and estimates for

MY2015/2016


Brazil is considered and expected to remain the most important exporting country for sugar due to its enormous production and

low consumption of it. The rapid development in the industry that took place in the 1990s occurred on the back of relatively low

production costs and vast land resources that is suitable to cultivate sugar cane. In MY2014/2015, it exported about 45% of the

total global exports, amounting to about 25 MMT. It is expected to maintain the leading position as the leading global exporter as

it is expected to export more than 30 MMT in 2020 and will account for more than 55% of global trade and more than 63% of all

additional sugar exports by MY 2020/2021. Definitely, the growing concentration of global sugar exports impedes high risk for

other sugar consumers as world export supplies depend mainly on the production capabilities of a few countries. Another risk is

Brazil’s tendency to produce bio-ethanol from sugar cane as ethanol is used as a petrol substitute (100% hydrous ethanol) and a

petrol complement (anhydrous ethanol which is a mixture of 20-25% of ethanol and petrol). It is expected that in 2023 Brazil

would allocate more than 63% of its sugar cane harvest in bio-ethanol production, where on a global scale, around 28% of the

sugar cane will be allocated to produce ethanol.

Regarding other exporting countries, Thailand and Australia are expected to witness a rise in their exports till the end 2020, as

they are expected to have exports of 8.4 M and 3.8 MMT respectively by 2020. Thailand is expected to invest heavily in new irriga-

tion schemes and technologies to improve output levels and Australia is expected to benefit from massive investments in existing

capacities, new capacities and new irrigation technologies.

Exports (1,000MT)

MY 2014/2015 (A)

% MY 2015/2016

(E) %

1) Brazil 24,550 45% 24,350 44%

2) Thailand 8,000 15% 8,300 15%

3) Australia 3,561 7% 3,650 7%

4) Guatemala 2,200 4% 2,350 4%

5) India 1,500 3% 2,200 4%

World 54,155 100% 55,812 100%

21) Egypt* 350 1% 300 1%



Prime Research 12

1.9. Imports:

Sugar importers make up a broader, more diversified group of countries. The table below shows the major importing countries for

Centrifugal Sugar worldwide in MY 2014/2015 and estimates for MY2015/2016


China is considered the world’s largest importer of sugar in both, MY 2014/2015 and MY 2015/2016. China’s sugar imports for MY

2015/2016 are forecasted to stand at 5.5 MMT due to higher levels of consumption and the continued growth in food manufacturing

sector.

It is expected that over the coming several years, major developments in some of the sugar producing countries will take place and

consequently impact the global sugar market. For example, ending the sugar and iso-glucose quotas in the EU in 2017 will result in

higher levels of sugar production for human consumption and consequently the EU imports will be reduced. Also Russia is expected

to witness a decline in its deficit as Russia’s own sugar production is expected to increase and at the same time the populat ion is

expected to decline. On the other hand, Asia and Africa will encompass the highest growth in sugar demand and consequently de-

mand higher imports.

1.10. Prices:

The global sugar market continues to witness considerable price volatility. Several factors have an effect on sugar prices; including

inflation, global weather conditions, ethanol production/usage, health care regulations and most importantly trade regulations and

government interventions.

Source: Index Mundi

Imports (1,000MT)

MY 2014/2015 (A)

% MY 2015/2016 (E) %

1) China 4,800 9% 5,500 10%

2) U.S. 3,143 6% 3,457 7%

3) EU 3,000 6% 3,200 6%

4) Indonesia 3,050 6% 3,200 6%

5) U.A.E. 2,400 5% 2,500 5%

World 51,551 100% 52,867 100%

16) Egypt* 1,330 3% 1,150 2%

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Prime Research 13

Source: London International Financial Futures and Options Exchange. (LIFFE)

Raw sugar prices (measured by the Coffee Sugar and Cocoa Exchange – CSCE Contract No. 11) reached their 30-year peak in 2011

(Jan. 2011: USD0.2974 /lbs and Jul. 2011: USD0.2947/lbs). Prices soaring up was a general trend for most of the commodities

worldwide. As for sugar, the price hike was mainly a result of unfavorable weather conditions (drought in summer of 2010, dry

weather in May 2011 and frost in June 2011) and the underinvestment of many sugar cane fields. During 2013 and afterwards sugar

prices began to weaken in response to excessive sugar production supplies due to favorable weather conditions that led to improve-

ment of the crop yields, in addition to the accumulation of large stocks after five consecutive years of large global surplus. During

the first 9 months in 2015, raw and refined sugar prices declined by almost 19% and 11% respectively. In Aug. 2015, raw sugar

prices reached a 8-year low standing at 10.67 cts/lbs, where it rebounded slightly in Sep. reaching 12.14 cts/lbs. Also the refined

sugar prices (measured by Contract No. 407 “aka No.5” for refined sugar, Spot Prices) followed the same suit reaching a very low

record of 15.57 cts/lbs in Aug. 2015 and it rebounded slightly in Sep. 2015 (the same case with raw sugar) reaching 15.93 cts/lbs.

World sugar prices are expected to continue with its volatility over the next several years and will not recover in the near future.

Even though global production is expected to decline in MY2015/2016, prices are not expected to increase due to the high levels of

inventory that have been piling up for the last couple of years.

According to the OECD-FAO Agricultural Outlook, it is expected that prices for raw sugar (Contract No. 11) and refined sugar

(Contract No. 407 – 5) will reach USD373/ton (USD 16.9 cts/lbs) and USD465/ton (USD 21.1 cts/lbs) respectively by 2020.

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6

Sep-9

7

Sep-9

8

Sep-9

9

Sep-0

0

Sep-0

1

Sep-0

2

Sep-0

3

Sep-0

4

Sep-0

5

Sep-0

6

Sep-0

7

Sep-0

8

Sep-0

9

Sep-1

0

Sep-1

1

Sep-1

2

Sep-1

3

Sep-1

4

Sep-1

5

Refined Sugar Prices - 1990 - 2015Cts/lbs



Prime Research 14

2. Local Sugar Industry Overview:

In Egypt, Sugar is considered a strategic good and the achievement of self-sufficiency has always been considered an important

national objective for its close attachment with political, social and economic aspects. Numerous governments of Egypt have inter-

vened to set prices and assure to supply the required quantities of sugar and other food staples as well, as they are consumed by all

Egyptians, regardless of their income level and social standard. Several efforts have been made by the government to achieve self-

sufficiency in sugar, including increasing beet cultivation, increasing land productivity for both; sugar cane and sugar beet and carry-

out nation-wide awareness campaigns to reduce the per capita consumption of sugar.

Egypt consumes around 3 MMT of sugar a year, yet it produces just over 2 MMT, where the gap is fully covered by imports (Self-

sufficiency around 70%). Till recent years, sugar production in Egypt used to depend mainly on sugar cane crops and it was concen-

trated in the Upper Egypt region; mainly in Menia, Sohag, Qena, Aswan and Luxor. The production of sugar from sugar beets was

recently introduced in Egypt. It is now concentrated mainly in the governorates and cities that lay over the Nile Delta, namely Kafr El

-Sheikh, El-Dakahlya, El-Fayoum, Beni-Suef, El-Sharquia, El-Gharbia and Menia.

There are 3 major factors that determine the production of sugar cane and sugar beets; the cultivated area, its productivity and the

price per ton. As previously mentioned, sugar cane cultivation needs plenty of irrigation water and Egypt has always suffered from

water scarcity where it always has represented an impediment for agricultural expansion and development in Egypt. Consequently,

sugar beets production is preferred over sugar cane, as 1 feddan (0.42 ha) planted with sugar cane needs around 8,000m3 of water

while in the case of sugar beets it would only need 3,000 m3 .

Sugar cane is planted in spring (February - March) and autumn (September – October) seasons, where the crop usually takes 11-12

months to grow. On the other hand, sugar beets are planted in August and September and harvested in March. Also there are by-

products of sugar beet such as molasses and beet pulp which are used as animal feed.

As for the concentration, sugar beets are more concentrated than sugar cane. Sugar beets have a concentration level of 13-18%,

and sugar cane has a concentration level of 10%. On the other hand, the yield for sugar cane is more than double the yield of sugar

beets, with an average yield of 50 MT/feddan for sugar cane and 20 MT/feddan for sugar beets. It is much cheaper to plant sugar

beets than sugar cane; as the cost of cultivating sugar cane is estimated to be around EGP15,600-18,000/feddan (USD873-995/

feddan) compared to EGP3,000/Feddan (USD428/Feddan) for sugar beets. Consequently, sugar beets are considered more profitable

for cultivators as pricing depends directly on the level of sugar concentration and at the same time due to it lower cost of produc-

tion. Also, the government has been encouraging farmers to cultivate sugar beets instead of sugar cane as in initiative of water pres-

ervation besides the higher levels of sugar concentration.

2.1. Production:

The sugar cane market is a pure monopoly in Egypt dominated by the Sugar and Integrated Industries Company (SIIC) (which is a

subsidiary of the Holding Company for Food Industries – HCFI), where it solely produces sugar from sugar cane through its sugar

refineries. SIIC has 6 sugar cane refineries; Naga Hamady, Deshna, Kous, Edfo, Armant and Kom Ombo. They are all located in Up-

per Egypt and they have a combined production capacity of almost 1 MMT of refined sugar.

As for the sugar beets, there are 6 different companies that refine sugar beets and they switch to refining imported raw sugar when

the sugar beet crop is out of season. Four companies are public-private partnerships (PPP), meaning that that the government – in

this case the SIIC – holds a majority stake and that these companies are SIIC-affiliates. The six companies have a combined produc-

tion capacity of 1.69 MMT; however the 4 SIIC affiliates do not work at full capacity due to the reliance on outdated technologies

and the scarcity of the skilled labor. As a consequence the combined capacity of the 6 companies would decline from 1.6 MMT to

reach 1-1.2 MMT.



Prime Research 15

Estimates - Production Capacity - Sugar Beets & Sugar Cane:

- SUGAR BEETS - SUGAR CANE

Company: Prod. Capacity Company: Prod. Capacity

* SIIC Affiliates: SIIC (6 Refineries) 1 MMT

1. Delta Sugar* 270,000 MT

2. Dakahlia Sugar 300,000 MT

3. Fayoum Sugar 120,000 MT

4. Nubaria Sugar 125,000 MT

Total 815,000 MT

* Private Companies:

5. Al-Nile Sugar 75,000 MT

6. Savola Sugar 800,000 MT

Total 875,000 MT

Total Sugar Beets 1.690 MMT

For raw sugar production, it is expected to increase in MY2015/2016 to reach 2.127 MMT, as compared to 2.067 MMT in MY

2014/2015, marking a 3% increase. This increase in aggregate production is mainly attributed to an increase in sugar production

from sugar beets. It is expected that the harvested areas for sugar beets will slightly increase in the coming years due to the fact

that many cotton farmers have switched to planting sugar beets instead of cotton. These farmers have been facing problems with

selling their cotton harvest due to the government’s new cotton policy. (The new cotton policy stipulates that in order for the gov-

ernment to supply the farmer with cotton seeds, the farmer must sign contracts with buyers first). Sugar production from sugar

cane is expected to remain stable as no change has occurred to the planting areas.

In MY2009/2010, Egypt produced 1.82 MMT of raw sugar and in it produced 2.07 MMT in MY2014/2015, representing a 5-year

CAGR of 3%

Source: USDA Foreign Agricultural Service—Egypt—Sugar Annual 2015

Source: USDA Foreign Agricultural Service—Egypt—Sugar Annual 2015

1.821.83

1.8

2 2.013

2.07

2.127

1.6

1.7

1.8

1.9

2

2.1

2.2

2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016*

Egypt Sugar Production MMT



Prime Research 16

The government tries to regulate the sugar industry throughout all the stages through several government intervention tools. In order

to flourish the local sugar industry and enhance its competitiveness versus the imported sugar, the government pays a subsidized

“supply price” for sugar cane and sugar beet cultivators to provide them with proper income levels and at the same time it reduces

the prices paid by the local sugar producers. In MY2014/2015 the “supply price” for sugar cane was EGP400/MT (SIIC pays EGP300

and MoSIT pays EGP100) and was EGP275/MT for sugar beet; however sugar refineries pay an additional EGP120 for beet cultivators

that deliver their crops earlier as usually the earlier-harvested crops have higher levels of sugar concentration.

At government shops and outlets, locally produced and imported sugar are both available, where they are offered at prices of

EGP5.15 (USD0.70) and EGP4.50 (USD0.60) per kilogram respectively. Refineries are selling locally produced sugar at higher prices

than imported sugar as they pay high prices to farmers, which eventually must be absorbed by the end-user.

2.2. Consumption:

Sugar is a very important food staple in all Egyptian houses. Sugar consumption is affected to a large extent by population growth;

and hence it is expected to continue growing at a steady rate as the Egyptian population has increased at an annual rate ranging

between 1.5-2.5% over the last several years. Raw sugar consumption is expected to reach almost 3MMT in MY2015/2016, marking a

2.5%increase as compared to the MY2014/2015 figure of 2.930 MMT. Over the last couple of years, there has been a gap of 1-1.5

MMT between consumption and production and it is usually satisfied by imports.

The government introduced a new “Food Subsidy Program” in July 2014. Eligible citizens (67 million citizens) are provided a

monthly cash assistance of EGP15 (USD2) per family member through a smart card, where the citizen can choose among 42 different

commodities (including sugar) based on market prices. As for sugar, there are 2 available types; imported sugar (MP: EGP4.50/kg =

USD0.60/kg) and locally-produced sugar (MP: EGP5.15/kg = USD0.70/kg). Citizens are able to use these smart cards at 25,000 pri-

vately-owned groceries and 4,000 government outlets.

However this new program has led to some serious dilemmas, due to the fact that the imported sugar is offered at a lower price than

the domestic sugar. As a result, citizens using the ration card would prefer to purchase the imported sugar instead of the local sugar;

which has led to the government accumulating large inventories of local sugar. Consequently, the government has showed unwilling-

ness to purchase sugar from the state-run SIIC’s sugar production and has been encouraging the private companies that refine im-

ported sugar to increase their outputs levels to meet demand.

2.3. Trade:

Regarding raw sugar, imports are expected to drop in MY2015/2016 to reach almost 1 MMT, marking a 0.3 MMT decline as compared

to the MY2014/2015 figure of 1.3 MMT. This decline will occur as a result of the expected increase in the production of raw sugar and

the ongoing accumulation of inventory from the previous marketing year. The increase in raw sugar imports in MY2014/2015 is an

obvious result of the citizens’ preference of the cheaper imported sugar rather than the domestically produced product.

Throughout the last several decades, different governments of Egypt have intervened with commodity markets (especially strategic

goods / staple foods; wheat, sugar and grains) in order to protect and stabilize the local production from the volatile and fluctuating

international markets. In April 2015, The Ministry of Foreign Trade & Industry (MoFTI) announced that a 20% tariff on “imported

refined sugar” will be applied for 200 days with a minimum tariff of EGP700/ton (USD91.7/ton). The 20% tariff is expected to be

equal to the difference between the lower import price and the higher local price. This initiative came on the back of concerns re-

garding the continuing decline in international prices which will severely harm the local industry which is already having troubles.



Prime Research 17

It is expected that the period for applying the tariff will be further extended as none of the industry’s

problems have been resolved. It was announced in November 2015 that the government is planning to

pass legislative amendments raising import tariffs on five categories of consumer goods, including “raw

sugar”, certain types of ready-made clothes and furniture. The additional tariff is expected to have the

range of 5-40% and would not exceed the limits set by international trade agreements. The amendments have

reportedly been approved by Cabinet and are awaiting the sign-off from Ittihadiya. As for raw sugar, we expect that the tariff

would only cover the gap between the international and local prices (c.20% as the tariff for the imported

refined sugar).

As for imports, the main trading partners of Egypt – Brazil and the European Union (EU) – will remain unchanged in MY2015/2016.

On average, imports from Brazil and the EU account for almost 90% and 8% respectively, where the remaining 2% comes from other

countries such as China and Argentina. There are different trade agreements that influence trade for sugar; The EU is exempted from

any import tariffs as a result of the “Egypt Free Trade Agreement” and Brazil on the other hand was subject to an import tariff of 2%

on raw sugar and 10% for refined sugar before the new tariff that was applied in April 2015.

Exports, on the other hand, are expected to decline in MY2015/2016 by 50,000MT to reach 300,000 MT. Egypt’s main export partners

are Sudan, Kenya and Libya.

2.4. Closing Balance:

Usually Egypt holds a strategic sugar stock that is equivalent to 2 months of consumption or around 500,000 MT. The stocks are usu-

ally held by the state-owned SIIC as a strategic reserve that would later be distributed to the ration card users. Egypt had a higher-

than-average level of ending inventory in MY2014/2015 as a result of the government allowing the imported sugar to be sold at the

government outlets and consumers’ co-operatives (which was sold at lower prices than the locally produced sugar) which led to the

inventory of locally produced sugar piling up and the extra stocks at SIIC were kept unsold. The industry still is facing prob-

lems, with inventory levels expected to reach 900,000 MT by the end of 2015. The implementation of the

new tariff is expected to flourish the industry to some extent, leading to the decline of inventory levels by

around 40% by 2016.



Prime Research 18

3. Delta Sugar Company - S.A.E.—Overview:

Delta Sugar Company S.A.E. is a state-owned Egyptian company that was

established in 1987. The company was listed on the Egyptian Exchange in

1992. It is a leading sugar producer that produces sugar from premium-

quality sugar beets. Majority (55.73%) of the company is owned by the

Sugar and Integrated Industries Co. (SIIC). The company relies mainly on

sugar production; however it also produces several by-products such as

animal feed (beet pulp) and beet molasses.

3.1. Operational Overview:

As previously mentioned, Delta Sugar Co. operates only one factory with two production lines in Kafr El Sheikh governorate. The

company usually operates with a utilization rate of more than 100%. The company constantly tries to enhance and upgrade the

production capabilities and capacities. The BOD approved raising the factory’s production capacity as to reach 17,500 tons of sugar

beets / day against 15,000 tons of sugar beets / day. This upgrade will lead to an increase in annual production by (+/-) 40,000 tons

of sugar, (+/-) 15,000 tons of animal feed and (+/-) 15,000 tons of molasses. This upgrade had a cost of EGP260 million and it has

been fully paid. The developments began in FY2013 and the factory will operate with the higher production levels starting FY 2015.

3.1.1. Product Mix:

Delta Sugar Co. produces three products; namely sugar, animal feed and molasses. Sugar production compromised more than 50%

of the company’s total production throughout the last several years. Animal feed and molasses have relatively similar shares ranging

from 20-26% each. In some years, the company refines raw sugar and molasses for other companies (international / local) when it

is out of season, yet it has a very minimal contribution.

Production (Tons) 2011 2012 2013 2014

Sugar 260,529 252,913 237,621 298,507

% 53% 51% 55% 57%

Animal Feed 115,533 131,381 104,868 124,067

% 24% 26% 24% 24%

Molasses 114,224 113,475 91,566 103,606

% 23% 23% 21% 20%

Total 490,286 497,769 434,055 526,180

% 100% 100% 100% 100%

Egyptian Sugar and Integrated Industries

Co. -(SIIC), 55.73%

Misr Life Insurance,

8.64%

Misr Insurance,

8.26%

Al Awqaf Egyptian Authority,

8.09%

Egyptian Chemical Industries,

6.46%

National Investmen

t Bank, 6.27%

Free Float, 6.55%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2011 2012 2013 2014

Sugar

Animal Feed

Molasses

Product MixTons



Prime Research 19

3.1.2. Sales: Delta Sugar Co’s sales revenue is mainly derived from sugar, while the animal feed and molasses also contribute but by far a much

lesser extent. In addition to that, Delta sugar refines raw sugar and molasses for other companies when it is out of season and it

has a very minimal contribution to the company’s revenues.

2011 2012 2013 2014

Sales - EGP ‘000s 1,373,138 979,048 1,529,716 1,353,168

Sugar Sales: 1,135,617 762,881 1,237,939 1,015,787

% Total Sales: 83% 78% 81% 75%

Animal Feed Sales: 134,862 138,580 170,068 211,750

% Total Sales 10% 14% 11% 16%

Molasses Sales: 102,659 77,587 121,709 125,631

% Total Sales: 7% 8% 8% 9%

SUGAR 2011 2012 2013 2014

Local 1,135,617 752,895 1,233,708 1,015,787

% of Sugar 100% 99% 100% 100%

Export 0 9,986 4,231 0

% of Sugar 0% 1% 0% 0%

Total Sugar Sales - EGP ‘000s 1,135,617 762,881 1,237,939 1,015,787

ANIMAL FEED 2011 2012 2013 2014

Local 3,077 22,886 12,763 18,859

% of Animal Feed 2% 17% 8% 9%

Export 131,785 115,694 157,305 192,891

% of Animal Feed 98% 83% 92% 91%

Total Animal Feed Sales - EGP ‘000s 134,862 138,580 170,068 211,750

MOLASSES 2011 2012 2013 2014

Local 10,947 16,276 23,261 28,542

% of Molasses 11% 21% 19% 23%

Export 91,712 61,311 98,448 97,089

% of Molasses 89% 79% 81% 77%

Total Molasses Sales - EGP ‘000s 102,659 77,587 121,709 125,631

TOTAL 2011 2012 2013 2014

Local 1,149,641 792,057 1,269,732 1,063,188

% of Total 84% 81% 83% 79%

Export 223,497 186,991 259,984 289,980

% of Total 16% 19% 17% 21%

Total Sales - EGP ‘000s 1,373,138 979,048 1,529,716 1,353,168

The entire sugar production is usually consumed domestically (c100%). The fact that sugar (the company’s top revenue driver) is

domestically consumed eliminates the company’s risk of fluctuating exchange rates. Meanwhile, the majority of the by-products -

molasses (c82%) and animal feed (c91%) - are exported to several countries, mainly European countries.

3.1.3. Sugar Beets:

Sugar beets cost compromise around 94% of the raw materials used and around 78% of all the COGS for DSC. The company has a

very large base of sugar beets suppliers (around 60K farmers). In order to ensure the supply of the required company, the com-

pany engages in contracts with the farmers to gain the entire harvest

The company does not own any agricultural land, which imposes a huge threat for the company. Farmers have a high bargaining

power over the company, where they demand higher prices for the sugar beets every year as there are many crops that they can

choose among (such as wheat and cotton). The price of sugar beets depend on many factors, most importantly, the sugar concen-

tration of beets and the relative profitability of competing crops. Moreover, companies usually pay higher prices for farmers’ early

supply as early harvested crops have higher sugar concentration compared to the late harvested crops, in addition to that it helps

the company starts the production process earlier. Each year, sugar companies announce a certain date at which they will start

taking delivery of sugar beets from farmers. Around EGP120/MT is given as a reward to each farmer that supplies the company in

the beginning and the amount is reduced gradually every week.



Prime Research 20

2011 2012 2013 2014

Price per Ton (Incl. Early Supply) 333 368 401 405

% Change - 10% 9% 1%

Total Sugar Beets Cost (,000s) 665,975 758,954 676,048 848,380

Supply of Sugar Beets (Tons) 1,996,981 2,060,814 1,686,324 2,093,091

Raw Materials (,000s) 804,300 777,356 692,030 868,326

% Sugar Beets / Raw Materials 83% 98% 98% 98%

COGS (,000s) 905,972 729,296 1,252,727 1,045,448

%Sugar Beets / COGS 74% 104% 54% 81%

84%

81%

83%79%

16%

19%

17%

21%

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2011 2012 2013 2014

Local Export

EGP ‘000s



Prime Research 21

3.1.4. Pricing:

- Sugar:

Even though sugar is domestically consumed, yet its pricing is somehow affected by the international prices. When the government

(MoFTI) sets the purchase price at which it will buy the production of sugar companies, it takes into consideration the international

prices and the sugar beets / sugar cane costs. DSC’ sugar prices coincided with the international prices, showing an annual decline

since 2011. DSC had to follow the international trend of declining prices, even though the sugar beets cost were rising, leading to

the tightening of the company’s margins.

The local sugar industry has faced major problems in the last several years. The local industry has suffered from the declining inter-

national prices since 2012, where they even reached levels that are lower than the domestically produced sugar In April 2015, The

Ministry of Foreign Trade & Industry (MoFTI) announced that a 20% tariff on imported refined sugar will be applied for 200 days

with a minimum tariff of EGP700/ton (USD91.7/ton). It is expected that the tariff implementation will be extended for a period

longer than 200 days. It was announced in November 2015 that the government is planning to pass legislative amendments raising

import tariffs on five categories of consumer goods, including “raw sugar”, certain types of ready-made clothes and furniture. The

additional tariff is expected to have the range of 5-40% and would not exceed the limits set by international trade agreements. The

amendments have reportedly been approved by Cabinet and are awaiting the sign-off from Ittihadiya. As for raw sugar, we expect

that the tariff would only cover the gap between the international and local prices (c.20% as the tariff for the imported refined

sugar).

The industry is still facing problems, with inventory levels expected to reach 900,000 MT by the end of 2015. The implementation of

the new tariff is expected to flourish the industry to some extent, leading to the decline of inventory levels by around 40% by 2016.

- Molasses & Animal Feed:

Since most of the by-products (molasses and animal feed) are exported, their pricing is determined based on demand and supply

and the company’s prices follow the suit of the global prices; where the company sets the price at a fixed rate in dollar terms. As

previously mentioned, the molasses from sugar beets is typically used in the process of ethanol production, which its pricing is highly

correlated with oil prices. In 2015 DSC’s molasses prices have declined by nearly 50%, which had a significant effect on the com-

pany’s profitability.

333

368

401 405

200

250

300

350

400

450

2011 2012 2013 2014

Cost of Sugar Beets - (EGP/Ton)During 2011-2014, the cost of sugar beets (cost per ton) increased at a

CAGR rate of around 7% which is reasonable. However, from an annual

perspective, the sugar beets costs appear to be more volatile and are the

outcome of negotiations between the farmers and the company.

Farmers have always complained that the government supports the sugar

cane farmers more than them as the cost of planting sugar cane is much

higher. However, the government is constantly encouraging farmers to

plant sugar beets instead of sugar cane to conserve water and due to its

higher concentration levels. It is expected that the harvested areas for

sugar beets will slightly increase in the coming years. This increase will

probably be from cotton farmers, who have been facing problems with

selling their cotton harvest due to the government’s new cotton policy.

(The new cotton policy stipulates that in order for the government to sup-

ply the farmer with cotton seeds, the farmer must sign contracts with

buyers first). The increase can have a very slight effect on the sugar

beets prices, however it will be offset with inflation.



Prime Research 22

SUGAR

2011 2012 2013 2014

* Delta Sugar - Local:

Quantities - Local - Tons 241,784 170,251 316,267 263,316

Prices - Local - EGP 4,351 4,159 3,899 3,858

Value - Local - EGP ‘000s 1,052,037 708,114 1,233,194 1,015,787

* Refining for Others:

Quantities - Local - Tons - Refining for Others

19,208 10,302 125 0

Prices - Local - EGP 4,351 4,347 4,112 0

Value - Local - EGP ‘000s 83,580 44,781 514 0

* Export:

Quantities - Export - Tons 0 2,580 995 0

Prices - Export - EGP 0 3,871 4,252 0

Value - Export - EGP ‘000s 0 9,986 4,231 0

ANIMAL FEED

2011 2012 2013 2014

* Local:

Quantities - Local -Tons 2,872 23,447 7,870 11,467

Prices - Local - EGP 1,071 976 1,622 1,645

Value - Local - EGP ‘000s 3,077 22,886 12,763 18,859

* Export:

Quantities - Export - Tons 112,661 107,934 96,998 112,600

Prices - Export - EGP 1,170 1,072 1,622 1,713

Value - Export - EGP ‘000s 131,785 115,694 157,305 192,891

MOLASSES

2011 2012 2013 2014

* Local:

Quantities - Local -Tons 10,901 15,412 25,405 23,023

Prices - Local - EGP 828 909 916 1,177

Value - Local - EGP ‘000s 9,033 14,003 23,261 27,091

* Export:

Quantities - Export - Tons 103,485 67,084 98,848 80,500

Prices - Export - EGP 886 914 996 1,206

Value - Export - EGP’ 000s 91,712 61,311 98,448 97,089

* Molasses From Refining for Others:

Quantities - Local - Tons - Ref. for Others

2,047 2,434 0 1,304

Prices - Local - EGP 935 934 0 1,113

Value - Local - EGP ‘000s 1,914 2,273 0 1,451

Sales Breakdown:



Prime Research 23

3.1.5. Inventory:

DSC has been having quiet high levels of inventory since 2011 and has been increasing till 2014 at a CAGR rate of 23%. Different

factors are behind the piling up of inventory. Due to the troubles in the local sugar industry, DSC’s inventory is expected to keep

piling up and it is expected to witness an increase in the inventory levels in 2015. DSC suffers from very high levels of inventory,

where finished goods compromise most of it (50% on average since 2011).

Finished Goods (Exc. goods held for others):

2011 2012 2013 2014

Quantity - Tons

Value - ,000s

Quantity - Tons

Value - ,000s

Quantity - Tons

Value - ,000s

Quantity - Tons

Value - ,000s

Sugar 21,369 66,700 101,439 367,726 21,739 80,054 56,874 202,392

Molasses 3,043 1,217 34,331 15,586 1,944 1,044 3,052 1,761

Ref. Sugar & Mol. 12,236 44,940 125 549 - - - 324

Total Finished Goods (Exc. goods held for others)

36,649 112,857 135,895 383,861 23,683 81,098 59,926 204,477

Total Inv. 192,677 - 513,109 - 220,072 - 356,478

% of Finished Goods from Total Inventory

59% 75% 37% 57%

192,677

513,109

220,072

356,478

0

100,000

200,000

300,000

400,000

500,000

600,000

2011 2012 2013 2014

Inventory Levels - Tons



Prime Research 24

- Inventory Days on Hands –DOH:

The high levels of inventory and the company’s inability to sell its products are reciprocated in the very high DOH (total inventory

and finished goods). These figures are expected to grow much further in 2015 (could reach to the 2012 levels or even more), where

the industry conditions will be reflected.

3.2. Managerial Risks / Weaknesses:

It does not own any agricultural land. This imposes a huge risk for the company as this give a very high bargaining power for

the farmers.

It failed several times in the past to undergo any expansion plans and to build a new factory or new production lines. Moreover,

it was unable to build any ethanol production facilities.

- It holds 3 major investments:

El-Fayoum for Sugar Company (Ownership stake: 26.8% - Value: EGP119,441,000)*.

Nubaria Sugar Company (Ownership stake: 30% - Value: EGP150,000,000).*

United for Package Production Company. (Ownership stake: 41% - Value: EGP12,710,000)*.

* Values of investments are as of End of 2014.

78

257

64

124

47

218

39

93

0

50

100

150

200

250

300

2011 2012 2013 2014

Inventory DOH Finished Goods DOH



Prime Research 25

3.3. Delta Sugar’s Performance in 9M 2015:

- Financial Performance:

DSC has suffered from very poor performance in 9M 2015. The company suffered from losses in 1Q 2015 and 3Q 2015, where it

achieved minimal profits in 2Q 2015 only. Comparing 9M 2015 with 9M 2014, it is obvious that all the company’s KPIs and margins

have deteriorated. We expect the losses to continue in 4Q 2015, where the company is expected to report a net loss in FY2015 of

around EGP24 million. The company will have no alternative to sell its products except at lower prices which will affect both its top-

line and bottom-line. Both—the company’s and the local industry's conditions will improve slightly in FY2016 incase of the implemen-

tation of the tariff on the raw sugar.

The company recorded a Net Income of EGP12.5 million for 9M 2015, compared to EGP182 million for the comparable period a year

earlier. This represented a deterioration of around 93%. The NPM showed a similar decline of around 91% for the same period.

- Revenues:

The sales figures for the 3 products have deteriorated in 9M 2015 in comparison to the same period a year earlier.

Delta Sugar Co’s sales revenue is mainly derived from sugar, while the animal feed and molasses also contribute but by far a much

lesser extent. In addition to that, Delta sugar refines raw sugar and molasses for other companies when it is out of season and it

has a very minimal contribution to the company’s revenues.

9M 2014 9M 2015

Change -

9M 2015 vs. 9M 2014

Revenues (EGP '000s) 964,715 746,594 -23%

COGS (EGP '000s) 665,000 620,000 -7%

Gross Profit (EGP '000s) 299,715 126,594 -58%

Gross Profit Margin - GPM 31% 17% -45%

EBITDA (EGP '000s) 256,979 78,057 -70%

EBITDA Margin 27% 10% -61%

Net Income (EGP '000s) 182,165 12,465 -93%

Net Profit Margin - NPM 19% 2% -91%

EPS (EGP) 1.28 0.09 -93%

9M 2014 9M 2015

Revenues (EGP Millions) 965 747

Total Sugar Revenues - (EGP Millions) 663 595

% Total Revenues: 69% 80%

Total Animal Feed Revenues - (EGP Millions) 212 99


Total Molasses Revenues - (EGP Millions) 90 53




Prime Research 26

- Production:

The production figures have increased in 9M 2015M, in comparison to the same period a year earlier. However most of the quanti-

ties produced have not been sold yet. This is more apparent in the inventory levels discussed below.

- Inventory:

The inventory levels of 9M 2015 are alarming. Total inventory increased by more than three-folds, reaching a value of EGP968 mil-

lion versus EGP356 million in the comparable period. Finished goods contribution of total inventory has increased in 9M 2015 dra-

matically, reaching 87% of total inventory. This increase shows that DSC has been unable to sell its products. It is expected that the

inventory levels will decrease slightly in 4Q 2015, reaching EGP660 million.

It is worthy to note that DSC witnessed a decline in its inventory level during 3Q 2015. In 9M 2015, the inventory levels reached

EGP969, against EGP1,096 in 1H 2015, implying that it has been able to sell around EGP127 million.

The finished goods inventory declined as well in 9M 2015 compared to 1H 2015 by around EGP160 million. 4Q 2015 is expected to

witness a further decline in the company’s inventory level as it will be able to sell more of its products.

9M 2014 9M 2015

Sugar:

Quantity (Tons) 149,819 220,042

Value (EGP '000s) 509,835 814,386

Animal Feed:

Quantity (Tons) - - Value (EGP '000s) - -

Molasses:

Quantity (Tons) 32,506 50,598 Value (EGP '000s) 17,943 29,786

9M 2014 9M 2015

Finished Goods Inventory (EGP '000s) 204,477 844,172

Total Inventory (EGP '000s) 356,478 968,815

% Finished Goods / Total Inventory 57% 87%

1H 2015 9M 2015

Finished Goods Inventory (EGP '000s) 1,003,233 844,172

Total Inventory (EGP '000s) 1,095,694 968,815

% Finished Goods / Total Inventory 92% 87%



Prime Research 27

3.4. Profitability Ratios’ Analysis:

- Gross Profit Margin – GPM & COGS/Revenue:

DSC’s gross profit and gross profit margin (GPM) have declined for 3 consecutive years till 2013. In 2014 the company was able to

break the downward trend and the profitability started to improve as GPM reached 24%. It is expected that it will decline severely in

2015.

DSC has quiet a high COGS/Revenue ratio and it rose dramatically from 2011 till 2013 then dropped slightly in 2014. As previously

mentioned raw materials compromise more than 84% of total COGS and is mainly driven by the cost of sugar beets. During 2011-

2014, the cost of sugar beets (cost per ton) increased at a CAGR rate of around 7% which is reasonable. The expansion in the har-

vested area of sugar beets can have a very slight effect on the sugar beets prices; however it will be offset with inflation.

34%

26%

18%

24%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2011 2012 2013 2014

Gross Profit Margin - GPM

66%

74%

82%

76%

60%

65%

70%

75%

80%

85%

2011 2012 2013 2014

COGS/Revenues Ratio

905,972

729,296

1,252,727

1,045,448

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1,200,000

1,300,000

2011 2012 2013 2014

Cost of Goods Sold -COGS -,000s EGP

333

368

401 405

200

250

300

350

400

450

2011 2012 2013 2014

Cost of Sugar Beets - (EGP/Ton)



Prime Research 28

- EBITDA & EBIT Margins:

Both the EBITDA and EBIT margins have declined sharply in 2011 and the downward trend has continued till 2013, which mainly

can be attributed to the decline in gross profit The rebound started in 2014 where both, EBITDA margin and EBIT margin recorded

20.70% and 17.95% respectively.

- Net Profit Margin - NPM:

The figure shows the deterioration of the company’s profitability

throughout 2011 till 2013. In 2014 the company was able to break the

downward trend and the profitability started to improve as NPM reached

14%. It is expected that it will decline severely in 2015.

448,646

235,167

255,435

283,875

32%

24%

17%

21%

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2011 2012 2013 2014

EBITDA EBITDA/Revenues (EBITDA Margin)

419,265

203,560 221,952

246,154

30%

21%

15%

18%

0%

5%

10%

15%

20%

25%

30%

35%

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2011 2012 2013 2014

EBIT EBIT/Revenues (EBIT Margin)

28%24%

12% 14%

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014

Net Profit Margin - NPM



Prime Research 29

3.5. Valuation:

Using the DCF Valuation method, based on a WACC Rate of 14.38% and a Perpetual Growth Rate of 3%, our valuation led to a value of EGP9.53 Per Share implying a downside risk of 7% (based on 11/11/2015 closing price of EGP10.21). Accord-ingly we assigned a “Sell” recommendation for Delta Sugar Company (SUGR.CA).

We expect SUGR to turn into profitability in FY2016 to record a bottom-line of EGP31 million after recording a net loss of EGP26 mil-lion in FY2015. We expect the industry to keep suffering in 4Q 2015. Starting from FY2017, global sugar prices would help the com-pany recover and get back to its normal profitability levels. However, we believe that the increasing cost of sugar beets to be the major concern for the company.

Discounted Free Cash Flow Model (DCF)

2015f 2016f 2017f 2018f 2019f Terminal

Value

NOPLAT

21,558

55,634

175,251

149,305

167,717

Non-cash Items

40,174

45,167

50,057

55,116

57,069

Gross Cash Flow

61,733

100,800

225,308

204,421

224,787

Change in Operating Working Capital

(324,197)

366,157

(21,329)

(21,430)

(22,852)

Capital Expenditure

(104,306)

(107,983)

(115,038)

(80,213)

(82,569)

Free Cash Flow

(305,936)

419,808

149,777

102,778

119,366

1,417,334

PV of Free Cash Flow (267,474) 320,886 100,091 60,048 60,972

Adjusted Value for Operation

Net Debt 45,443

Long-term investment

282,151

Minority Interest 0

Shareholder Value 1,355,165

Target Price (EGP/share) 9.53

Market Price (EGP/share) 10.21

Upside potential -7%



Prime Research 30

Income Statement 2013a 2014a 2015e 2016f 2017f

Revenue 1,530 1,372 1,083 1,409 1,653

Growth 55.8% -10.3% -21.1% 30.1% 17.3%

COGS 1,253 1,045 1,016 1,258 1,323

S,G & Admin. Expenses 22 22 16 21 25

Other Provisions 0 20 32 21 25

EBITDA 255 284 18 109 280

Growth 8.6% 11.3% -93.7% 505.7% 157.8%

EBITDA Margin 17% 21% 2% 8% 17%

Depreciation & Amortization 33 38 40 45 50

EBIT 222 247 -22 63 230

Interest Income 9 4 3 3 3

Investment Income 19 38 28 30 31

Interest Expense 21 33 49 55 21

Non-Operating Income 5 5 0 1 3

Non-Operating Expenses 0 0 0 0 0

Extra-Ordinary Items 4 3 3 3 3

Pre Tax Income 238 263 -38 44 249

Income Tax 49 65 -11 13 75

Effective Tax Rate 21% 25% 30% 30% 30%

Net Income 189 198 -26 31 174

Growth -19.4% 4.6% -113.4% -217.6% 459.7%

Profit Share to Employees & Board 18 19 -3 3 17

Net Attributable Income - NAI 171 179 -24 28 157

Growth -27.0% 4.6% -113.3% -218.1% 459.7%

NPM 12.4% 14.4% -2.4% 2.2% 10.5%

Balance Sheet 2013a 2014a 2015e 2016f 2017f

Cash & Marketable Securities 164 148 158 168 218

Trade Receivables-Net 23 23 32 35 41

Inventory 220 356 660 297 278

Other Current Asset 85 80 62 73 78

Total Current Asset 492 607 912 574 615

Net Fixed Assets 472 516 580 643 708

Projects Under Implementation 135 183 122 61 0

Subsidiaries & Other Long Term Investments 282 282 282 282 282

Other Assets 0 0 0 0 0

Total Assets 1,381 1,587 1,896 1,560 1,605

Short Term Bank Debt 0 129 681 239 119

Accounts Payable 82 104 102 126 119

Other Current Liabilities 78 92 27 36 37

Total Current Liabilities 160 324 810 401 275

Long-Term Debt 0 0 0 0 0

Provisions 48 71 104 125 149

Other Non Current Liabilities 0 0 0 0 0

Total Shareholders' Equity 1,173 1,192 982 1,034 1,181

Total Liab.& Shareholders' Equity 1,381 1,587 1,896 1,560 1,605

Free Cash Flow Statement 2013a 2014a 2015e 2016f 2017f

NOPLAT 170 200 22 56 175

Non-Cash Items 33 38 40 45 50

Gross Cash Flow 204 238 62 101 225

Change in Operating Working Capital 444 -144 -324 366 -21

Capital Expenditure -173 -129 -43 -47 -54

Free Cash Flow Excluding Goodwill 475 -36 -306 420 150

Investment in Goodwill, Intangibles & and Adjustment 0 0 0 0 0

Free Cash Flow Including Goodwill 475 -36 -306 420 150

Stock Recommendation Guidelines

Recommendation Target-to-Market Price (x)

Buy x > 15%

Accumulate 5%< x <15%

Hold -5% < x < 5%

Reduce -15% < x < -5%

Sell x < -15%

Investment Grade Explanation

Growth 3 Yr. Earnings CAGR > 20%

Value Equity Positioned Within Maturity Stage of Cycle

Speculative Quality Earnings Reflect Above Normal Risk Factor



Prime Research 31



Prime Research 32

- List of Abbreviations:

Cts: Cents

FAO: Food and Agriculture Organization of the United Nations

HA: Hectare

HCFF: Holding Company for Food Industries

Kg: Kilogram

Lbs: Pound

MMT: Million Metric Tons

MoFTI: Minstry of Foreign Trade and Industry

MoSIT: Ministry of Supply and Internal Trade

MT: Metric Tons

MY: Marketing Year

OECD: Organisation for Economic Co-operation and Development

PPP: Public Private Partnerships

SIIC: Sugar and Integrated Industries Co.

USDA: U.S. Department of Agriculture



Prime Research 33

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Documents

Delta Sugar Co. - Initiation of Coverage - 12 November 2015