Got milk? BUYcontent.argaam.com.s3-external-3.amazonaws.com/877b4e39-c533-… · Got milk? * – BUY JUFO is Egypt’s leading producer of dairy products and its shares provide direct

Initiation of Coverage Egypt Food & Beverages 31 May 2012

JUHAYNA FOOD INDUSTRIES

1 Zeinab El-Beheiry

+202 3300 5328 [email protected]

Got milk?* – BUY JUFO is Egypt’s leading producer of dairy products and its

shares provide direct exposure to the country’s attractive

domestic demand story – a scarcity on the EGX. Strong forecast

revenue growth (20% CAGR over 2012-16E) will be underpinned

by population growth and spurred by the conversion from loose

to packaged milk, product diversification, and growth in per

capita income. Margins are currently under pressure in 2012

owing to higher raw milk prices, but backward integration (into

milk and fruit farms) should boost gross margin and, to a lesser

extent, EBITDA margin, in 2013 and 2014. We value JUFO on a

DCF basis at EGP5.0/share. It trades at a P/E of 9.6x 2013E, at a

41% discount to the developing nations’ peer average of 16.4x.

We initiate with a BUY recommendation.

► Volume growth assured. We forecast JUFO to generate strong

revenue growth at a CAGR of 20% over 2012-16E underpinned

by population growth (2% p.a.) and spurred by the conversion

from the loose to the packaged product, product diversification,

and growth in per capita income. This conversion is in its early

stages, but we believe it will continue to be helped by

marketing/awareness campaigns. Yoghurt sales are responding

to product enhancements and the general increase in health

awareness. Juice penetration is very low (3kg/year) vs. that of

global peers, and the market is due for consolidation. Further,

although large foreign players are entering the dairy sector, we

believe this would stimulate market growth and conversion rate

► Backward integration lifts margins. The increase in raw milk

prices and other cost inflation should see EBITDA margin

contract slightly in 2012 (to 34.1% from 34.8% in 2011). In

addition, the entry of foreign players will exert downward

pressure on margins, through keener prices and greater spend

on branding and marketing. Nevertheless, JUFO aims to secure

up to 50% of its raw milk and fruit needs through its own milk

herd and fruit farm. This should enhance gross margin by c.

200bps in 2013 and 100bps in 2014 and, we believe, this should

lift gross and EBITDA margins in 2013 and 2014; while EBITDA

margin should narrow post 2014

► The powdered milk dilemma. Powdered milk accounts for c.

20% of JUFO’s milk input needs, and we expect this to rise to c.

50% by 2015. We also believe liquid raw milk supply will lag milk

demand and that the current supply gap will widen. Secondly,

we expect the increase in milk consumption to be evident in the

lower-end brands (e.g. Bekhero and Halibo), which have higher

powder content. The greater reliance on powder (more

expensive than liquid milk) also suggests pressure on margins in

the longer term. The import of powdered milk exposes JUFO to

EGP devaluation risk

► Valued on a DCF basis at EGP5.0 per share. We value JUFO on

a DCF basis at EGP5.0/share. It trades at a P/E of 9.6x 2013E, a

41% discount to the developing nations’ peer average of 16.4x.

* “Got Milk?” Is an American advertising campaign encouraging the consumption of milk

Recommendation Buy

Market Price (EGP) 4.3

Fair Value (EGP) 5.0

Upside Potential (%) 17.2

EGX 30 Index 4,686

Stock Data

Reuters Code JUFO.CA

Bloomberg Code JUFO EY

Shares Outstanding (m) 706

Market Cap (EGPm) 3,029

Market Cap (USDm) 501

Free Float (%) 48%

JUFO vs. EGX 30 (rebased)

Source: Bloomberg, NAEEM Research

Financial Indicators & Valuation Multiples

Year to 31 Dec. 2010a 2011a 2012f 2013f 2014f

Revenue (EGP) 1,875 2,251 2,742 3,322 3,991

Revenue (% Δ) 17.3 20.0 21.8 21.2 20.1

EBITDA (EGP) 429 421 499 652 798

EBITDA Margin (%) 22.9 18.7 18.2 19.6 20.0

EPS (EGP) 0.30 0.20 0.32 0.44 0.58

EPS (% Δ) (57.8) (32.4) 58.6 37.6 31.2

P/E 14.2 21.0 13.2 9.6 7.3

P/CPS 6.7 8.8 7.6 5.7 4.6

Yield (%) nm 3.5 nm 6.5 9.3

ROE (%) 20.5 10.8 11.8 14.8 18.1

Net debt/Equity (x) 0.02 0.12 0.32 0.31 0.25

Int. Cov. (x) 5.1 7.3 4.8 5.4 7.0

Source: Company data, Reuters, NAEEM estimates

Closing price as of 30 May 2012

3.43.74.04.34.64.95.25.55.8

May-1

1

Jun

-11

Jul-

11

Aug

-11

Sep

-11

Oct-

11

No

v-1

1

Dec-1

1

Jan

-12

Feb-1

2

Mar-

12

Ap

r-12

May-1

2

JUFO EGX30 Rebased

Price (EGP)

2

Contents

Volume growth assured ............................................................................................................................................................ 3

Sustainable growth in F&B consumption ................................................................................................................................... 3

F&B resilient to poor economic backdrop.................................................................................................................................................3

Consumption stimulated by rising per capita GDP ................................................................................................................................4

Demographics support future demand growth .......................................................................................................................................5

Underpenetrated market ..............................................................................................................................................................................5

From loose to packaged milk ...................................................................................................................................................................6

Plenty of room for growth in the juice market ......................................................................................................................................7

Yoghurt market more mature, but product enhancements driving sales ..........................................................................................8

Operational catalyst for growth ..................................................................................................................................................................9

Product diversification ............................................................................................................................................................................ 10

Developing B2B relationships ................................................................................................................................................................ 10

Expansion of distribution network ....................................................................................................................................................... 10

Strong top-line growth ............................................................................................................................................................................ 10

Backward integration lifts margins ........................................................................................................................................12

Diversified supplier base ........................................................................................................................................................................ 12

Raising milk yields and quality ............................................................................................................................................................. 13

Securing concentrate for juices .............................................................................................................................................................. 14

Entry of multinational players to shake up milk market ....................................................................................................................... 14

JUFO’s market share to fall .................................................................................................................................................................... 15

Net effect of these two influences on margins ..................................................................................................................................... 16

Risks inherent in both raw milk and powdered milk supply .............................................................................................17

Raw milk pricing hostage to commodity price movements .............................................................................................................. 17

Greater reliance on powdered milk ...................................................................................................................................................... 18

Forex risk .................................................................................................................................................................................................. 19

DCF value of EGP5.0 per share ...............................................................................................................................................20

DCF valuation .......................................................................................................................................................................................... 20

Relative valuation .................................................................................................................................................................................... 21

Litigation ................................................................................................................................................................................................... 22

Appendix 1: Historical and forecast KPIs ..............................................................................................................................23

Appendix 2: JUFO’s summary financials ...............................................................................................................................24

Financial summary: ................................................................................................................................................................................. 25

Disclosure Appendix ................................................................................................................................................................26

JUHAYNA FOOD INDUSTRIES (JUFO)

3

Volume growth assured

► Fast-moving Consumer Goods (FMCG) demand insulated from effects of any

political and economic upheaval in Egypt

► Population growth of c. 2% per annum underpins customer growth

► Food and Beverage (F&B) demand to surge as income levels grow and the

middle-income segment expands

► Health awareness and convenience driving conversion from loose to packaged

dairy products

► Value-added products spurring yoghurt sales

► Juices winning converts from carbonated drinks

► Well-diversified product range

► Strong distribution base and excellent B2B relationships

Although Egypt’s packaged dairy industry was born in the 1980s, it has yet to reach

maturity. We believe the conversion from the loose product will be driven principally

by i) continued growth in per capita consumption reported by the F&B sector, ii) a

large, young population that is seeing a high growth rate, and iii) the under

penetration of packaged dairy products. We forecast market demand for packaged

dairy products to grow at a CAGR of 18% and for juices at a CAGR of 17% over

2012-16E.

Figure 1: Packaged dairy – market size Figure 2: Packaged juices – market size

Source: Company data, NAEEM estimates Source: Company data, NAEEM estimates

Sustainable growth in F&B consumption

F&B resilient to poor economic backdrop

During Egypt’s political upheaval in 2011, private consumption remained relatively

robust and expanded 4.5% YoY in FY11 compared to the 1.8% growth in GDP. This

divergence can be explained by the fact that Egyptians spend the bulk of their

income on basic necessities (particularly food), which means that even during times

of economic or political uncertainty, private consumption remains solid. During

FY11, private consumption represented c. 73% of GDP and FMCGs such as food,

cigarettes, and medicine experienced steady growth despite Egypt’s economic

deterioration.

140

180

220

260

300

340

380

420

460

500

07A 08A 09A 10A 11A 12F 13F 14F 15F 16F

Tons ('000s)

150

250

350

450

550

650

750

850

07A 08A 09A 10A 11A 12F 13F 14F 15F 16F

Tons ('000s)

Robust private consumption

An array of factors driving market

demand

4

Figure 3: Real GDP and consumption growth YoY Figure 4: Disposable income spending by type

Note: We have used fiscal years

Source: CBE, NAEEM Research

Source: CAPMAS, Country data, NAEEM Research

Consumption stimulated by rising per capita GDP

As Egyptians spend the largest portion of their income on basic consumer goods,

companies such as JUFO that operate in the F&B sector will be a direct beneficiary of

rising income levels. Furthermore, as income levels rise, demand for processed and

packaged foods is likely to grow, owing to increased health awareness and as

Egyptians seek more convenience in their daily lives. According to Business Monitor

International (BMI), Egypt’s per capita GDP is set to rise at a CAGR of 14% per

annum through 2016. In addition, the Economist Intelligence Unit (EIU) forecasts

Egypt’s F&B expenditure to rise at a CAGR of 10% per annum through 2015.

Figure 5: Per capita GDP Figure 6: Food, Tobacco & Beverages (FT&B) consumer

expenditure

Source: CBE, BMI, NAEEM Research Source: EIU, NAEEM Research

According to a study conducted by the Food and Agriculture Organization of the

United Nations (FAO), dairy has higher income elasticity of demand (a measure of

the percentage increase in expenditure on dairy resulting from a 1% increase in

income) than do all other sub-categories within the F&B sector. It also has slightly

higher income elasticity of demand than does meat and significantly higher elasticity

than does fish. In other words, as incomes increase, expenditure on dairy products

will grow more rapidly than that on most other food items, in percentage terms. The

following table illustrates that demand for food, including dairy products, is more

responsive to change in income in low-income countries, meaning that growth in

the consumption of dairy products is estimated to react strongly to increases in

income, especially in low- and middle-income countries.

68

69

70

71

72

73

1.5

2.5

3.5

4.5

5.5

6.5

7.5

03A 04A 05A 06A 07A 08A 09A 10A 11A

%%

Real GDP YoY growthPrivate consumption YoY growthPrivate consumption as a % of GDP (RHS)

F&B45%

Housing and public utilities

14%

Education12%

Healthcare8%

Entertainment7%

Savings4%

Auto2%

Electronics8%

700

1,200

1,700

2,200

2,700

3,200

3,700

4,200

4,700

5,200

5,700

04A 05A 06A 07A 08A 09A 10A 11A 12F 13F 14F 15F 16F

USD

25

35

45

55

65

75

85

95

105

115

125

06A 07A 08A 09A 10A 11E 12F 13F 14F 15F

USDbn

Rising per capita income drives

packaged food demand

Diary has higher income elasticity

than other food stuff


5

Figure 7: Average expenditure elasticities for food sub-categories (a sample of

144 countries)

Product

Low-income

countries

(N*=28)

Lower middle-

income countries

(N=36)

Middle-income

countries

(N=36)

High-income

countries

(N=44)

FT&B 0.81 0.77 0.70 0.54

B&T 1.73 1.13 0.92 0.67

Cereals 0.59 0.49 0.34 0.08

Meat 0.80 0.76 0.69 0.53

Dairy 0.83 0.79 0.72 0.55

Fish 0.69 0.64 0.56 0.42

Fats, oils 0.60 0.50 0.37 0.15

Fruits 0.66 0.60 0.51 0.36

Other foods 1.82 1.23 0.98 0.70

Note: N denote sample size

Source: FAO working paper No. 12-01, NAEEM Research

Demographics support future demand growth

Egypt has a young population of c. 85m, which is growing at a c. 1.9-2.0% per

annum (one of the highest growth rates among developing nations). Egypt is also

the most populous country in the Arab world and thus, potentially, the most

dynamic FMCG market in the Middle East. Those under 20 years of age and who

currently represent 41% of the population comprise both the customer base for the

next 10 years and the main driver of future growth in domestic consumption.

Figure 8: Population growth Figure 9: Breakdown of population by age

Source: Department of Economic and Social Affairs, NAEEM estimates Source: CBE, NAEEM Research

Underpenetrated market

The Egyptian dairy and juice product markets are among the most underpenetrated

in those emerging economies with very low per capita consumption; this can be

attributed, in part, to the lack of affordability and health awareness. Accordingly, the

expected growth in per capita income, a better redistribution of wealth among

segments (especially post revolution), and the expansion of the middle class,

combined with the demographic factors mentioned above, create a strong backdrop

to support volume growth.

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

2.7

01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11E 12F

%

Egypt Nigeria China India

Thailand Turkey Brazil

0-1941%

20-4943%

50+16%

Young and fast growing population

Egypt dairy and juice market

underpenetrated

6

Figure 10: Per capita dairy consumption Figure 11: Per capita milk consumption vs. GDP per capita

Source: Company data, NAEEM Research Source: Company data, IMF, NAEEM Research

Moreover, the market is currently experiencing a structural shift towards packaged

milk and juices (away from the loose product), as consumers become more health-

conscious as a result of awareness campaigns and as the entry of international

players with their depth of experience in marketing and R&D impact the market. The

effect of the latter factor is evident from the sharp acceleration in the conversion

rate in yoghurt following the entrance of foreign brands such as Danone, Lactel, and

Nestlé.

From loose to packaged milk

The Egyptian milk market comprises both loose and packaged products, with the

former still accounting for 87% of the total market in 2011. This is attributed to the

lack of health awareness among the majority of Egyptians who are of the view that

loose milk (delivered by peddlers to the home) is healthy, natural, and unprocessed

and that boiling milk at home will lessen the hazards. We note, however, that loose

milk does not go through the sterilisation, pasteurisation, or UHT processes.

Given the health hazards associated with loose milk (e.g. the risk of Salmonella, E.

coli, and Listeria), an awareness campaign was launched through public-private

collaboration between the Ministry of Health (MoH), TetraPak, and the dairy

companies in August-December 2009 under the slogan “Packed milk is safe, and the

Ministry of Health is the guarantee”, highlighting the dangers of loose milk. The

campaign included educational seminars targeting school children and television

advertising aimed at adults, especially mothers. This led to an improvement in the

conversion rate from 11% in 2009 to 13% in 2011. The second phase of the

campaign was launched in June 2010, and the third phase has been postponed

owing to the political turmoil in Egypt, but is likely to be launched in 1H13. We

estimate the conversion rate to reach 22% by 2016 with the continuation of the

campaign and marketing activities by international players.

A similar awareness campaign was conducted in Turkey, where packaged milk

consumption increased from 32% of the market in 2002 to 61% in 2011 (according

to TetraPak). The campaigns were, again, led by TetraPak in partnership with the

MoH and milk producers, and were communicated through television, advertising,

and educational seminars.

We see the possibility of replicating the Turkish model in Egypt, albeit at a slower

pace given the lower literacy and urbanisation rates, lower per capita income, and

higher income disparity. As with the yoghurt segment, we believe that the entry of

international players into milk sales will stimulate the conversion to packaged milk as

well.

0

20

40

60

80

100

120

Austr

alia

Sw

itze

rlan

d

Un

ited

Sta

tes

New

Zeala

nd

Saud

i Ara

bia

EU

Bra

zil

Ind

ia

Mexic

o

So

uth

Ko

rea

Eg

yp

t

Ch

ina

Ven

ezu

ela

Vie

tnam

Kg

Brazil

Mexico

Egypt

China

Vietnam

Saudi Arabia

0

5

10

15

20

25

0 20 40 60 80

Milk consumption per capita (kg)

GDP per capita (USD'000s)

Shift from loose to packaged

products


7

Figure 12: Egypt’s milk conversion rate Figure 13: Turkey’s milk conversion rate

Source: Company data, NAEEM estimates Source: Company data, NAEEM Research

Figure 14: Urbanisation Figure 15: Adult literacy

Source: World Bank, NAEEM Research Source: : UNESCO, World Bank, NAEEM Research

Plenty of room for growth in the juice market

Egypt’s hot, dry climate and avoidance of alcohol are key factors influencing the

growth in soft drinks. The juice market is currently dwarfed by the carbonated soft

drinks (CSD) market, as Egyptian consumers are amongst the lowest consumers of

juices worldwide; in 2011, per capita consumption came in at 3kg cf. 26kg in Saudi

Arabia. Egypt’s per capita CSD consumption, on the other hand, was 39kg.

This surprisingly low consumption of juice may be explained by a lack of awareness

of the side-effects of CSDs (a can contains an average of 40g, or 10 cubes, of sugar),

juice not being considered a necessity as is milk, Egyptians having historically been

consumers of caffeinated drinks such as tea and coffee, and the lack of strong

marketing campaigns such as those run by CSD market giants Pepsi and Coca-Cola.

There is now more effort being directed at improving health awareness [e.g. the

“five-a-day” recommendation and negative publicity about the high-fructose corn

syrup (HFCS) content in CSDs] and more being spent on marketing; such efforts, we

believe, should result in an increased acceptance of juices.

89 90 89 87 87 86 84 82 80 78

10.5 9.9 10.7 13.0 13.0 14 16 18 20 22

0

10

20

30

40

50

60

70

80

90

100

07A 08A 09A 10A 11A 12F 13F 14F 15F 16F

%

Loose milk Packaged milk

68 66 62 57 53 50 45 40

32 34 38 43 47 50 55 60

0

10

20

30

40

50

60

70

80

90

100

02A 03A 04A 05A 06A 07A 08A 09A

%

Loose milk Packaged milk

40 45 50 55 60 65 70 75 80 85 90

Egypt

Indonesia

China

Nigeria

Turkey

Saudi Arabia

Brazil

%

60 70 80 90 100

Nigeria

India

Egypt

Brazil

Turkey

Indonesia

Vietnam

China

Russia

%

Egypt’s per capita juice consumption

surprisingly low

8

Figure 16: Per capita juice consumption Figure 17: Egypt’s per capita CSD consumption

Source: Company data, NAEEM Research Source: BMI, NAEEM Research

Egypt’s juice market is highly fragmented; 2011 saw over 300 active players. We

believe, however, that JUFO could boost the sales in this segment by acquiring

smaller niche players. It has already introduced multiple products that cover

different market segments, including bottled juice drinks, and has introduced new

flavours to its high-end (high-margin) brand “Juhayna Pure”. Although we are

concerned about the current shift in consumer preference to the cheaper, low-

margin drink category from the nectar and pure categories in 1Q12, we think this

may be linked to the present economic situation, and that it will adjust following

economic recovery.

Figure 18: Egypt’s juice market by package type Figure 19: Egypt’s juice market by fruit content

Source: Company data, NAEEM Research Source: Company data, NAEEM Research

Yoghurt market more mature, but product enhancements driving sales

The yoghurt market has experienced strong growth over recent years, owing to a

rapid conversion (from the loose product), the introduction of value-added products

(e.g. light, digestive, and flavoured products), and strong marketing campaigns.

Moreover, the price difference between the packaged and the loose product is only

10% (in milk, the difference is at least c. 20%), as loose yoghurt is also sold at retail

outlets and retailers pass their fixed costs to the end user (whereas milk peddlers

have very marginal fixed costs).

Yet, Egypt’s yoghurt consumption per capita is relatively low compared with that of

peers, at c. 3kg per capita cf., for example, Tunisia’s 7kg per capita (Figure 20). This

could be a result of the different diet patterns between the two countries: yoghurt is

an essential component in Tunisian daily meals but only a seasonal product in Egypt

– in high demand during summer months and Ramadan to aid digestion. We

believe, however, that there is still substantial room for per capita consumption

growth.

0

10

20

30

40

50

60

Can

ad

a

US

A

Germ

an

y

Austr

alia

Fra

nce

UK

Saud

i Ara

bia

Bah

rain

Kuw

ait

Qata

r

Lib

ya

Alg

eri

a

Eg

yp

t

Jo

rdan

Litres

15

17

19

21

23

04A 05A 06A 07A 08A 09A 10A 11F

Litres

40 41 43 4548

28 29 26 22 18

31 29.5 29 29 27

1 1 2 4 7

0

10

20

30

40

50

60

70

80

90

100

07A 08A 09A 10A 11A

%

Cartons Pouches Bottles Cans

8371

56 56 59

1426

42 42 38

3 3 3 3 3

0

10

20

30

40

50

60

70

80

90

100

07A 08A 09A 10A 11A

%

Nectar Drink Pure

Good market segmentation

Product development key in yogurt

segment


9

Egyptian packaged yoghurt producers have latched on to the digestion-aid

properties in their advertising campaigns, and this has led to the rapid conversion to

packaged yoghurt over the past three years, a trend that we expect to continue over

the next few years, albeit at a slightly slower pace. We also expect more value-added

products to be introduced, particularly those with health properties.

Figure 20: Per capita yoghurt consumption Figure 21: Yoghurt conversion rate


Operational catalyst for growth

JUFO commenced operations in 1987 as one of the producer of long-life packaged

dairy products in Egypt, with a total capacity of 35 tons/day (now 2,900 tons/day).

This includes milk, cream and cheese, spoonable and drinkable yoghurt, and fruit

juice and juice concentrates all under the brand names “Juhayna” and “Bekhero”. It

has a leading market share of 73% in the packaged milk segment (plain and

flavoured), 28% in the packaged yoghurt segment (spoonable and drinkable

yoghurt), and 17% in the packaged juice segment. It also boasts a large, well-

developed distribution network, which affords it access to a significant portion of

Egypt’s population. In addition, it has a core portfolio of large corporate customers

who buy its products in bulk, and often on longer-term contracts.

The majority of JUFO’s products are sold locally, but it also exports dairy and juice

products, mainly to Libya and the Middle East. The company estimates its market

share in Libya was c. 20-30% in 2011.

Figure 22: Breakdown of revenue by line of business Figure 23: Breakdown of sales

Source: Company data, NAEEM Research

Note: 85% of exports is milk


0

5

10

15

20

25

30

France Oman Tunisia Australia Saudi Arabia

Egypt

Kg

60 5647 44

34

40 4453 56

66

0

10

20

30

40

50

60

70

80

90

100

07A 08A 09A 10A 11A

%

Loose yoghurt Packaged yoghurt

Dairy51%

Yoghurt27%

Juices19%

Concentrates2%

Agriculture1%

Local 94%

Export6%

Large market shares across market

range

10

Product diversification

JUFO is unique among dairy and juice producers in Egypt in that it has allocated a

separate factory for each segment. Each line of business (LoB) has also diversified its

product range to meet the needs of customers across income levels, to cater to

different tastes, and to promote various health properties. This enables JUFO to

maintain its leading market share in each segment.

Figure 24: JUFO’s product diversification

Milk products Yoghurt products Juice products

Juhayna Spoonable (plain, fruit, light, flavoured, sweetened, and mixed) Nectar (25-50% fruit content)

Bekhero Drinkable (Rayeb and Zabado) Pure (100% fruit content)

Halibo Bekhero drinks (


11

Figure 25: Breakdown of annual revenue

Source: Company data, NAEEM estimates

0

1,000

2,000

3,000

4,000

5,000

6,000

08A 09A 10A 11A 12F 13F 14F 15F 16F

EGPm

Dairy Yoghurt Juices Concentrates Agriculture

12

Backward integration lifts margins

► Diversifying sources of raw material to counter bargaining power of suppliers

► International players entering or acquiring locals intensifies competition

► Backward integration to secure 50% of own raw material supply should boost

margins in 2013-14 and temper the downward pressure from competition

thereafter

JUFO faces two major issues that influence its longer-term operating performance

and profitability: i) the availability of raw materials at reasonable costs and the

requisite quality and, ii) aggressive competition from the growing presence of

international players with proven business models. To address these issues, JUFO

has adopted a two-pronged approach – first, to backwardly integrate to secure raw

materials and second, product diversification/market segmentation.

Diversified supplier base

Raw and powdered milk are the main components of milk products and yoghurt,

while fruit and concentrates are the main inputs for juices. Raw and powdered milk,

combined, account for c. 55% of COGS, while raw milk alone accounts for 30% of

GOGS.

Since 2008, management has established multiple sources for its raw material needs,

diversifying among local suppliers, JVs, and recently, its own dairy and fruit farms.

JUFO plans to meet c. 40-50% of its raw milk and fruit requirements from its own

farms by 2015.

Figure 26: Breakdown of COGS


Currently, JUFO relies on the following sources to meet its raw material

requirements:

► Local dairy farms (including small-scale herds)

► Its JV Milkes Dairy (in which it owns c. 40%) that provides 10% of its raw milk

requirements

► Milk powder, butter oil, and milk protein from Denmark and New Zealand

► Concentrates from its concentrates subsidiaries

► Packaging from Sweden’s TetraPak (for packaging dairy products) and

Switzerland’s Combibloc (for packaging juice products)

Raw and powdered milk

55%Packaging costs

25%

Manufacturing13%

Sugar concentrates

7%

Moving to secure 50% of raw milk

and fruit production requirements

JV Milkes Dairy provides 10% of its

raw milk requirements


13

Raising milk yields and quality

Raw milk is the core input in packaged milk and the second-largest ingredient for

yoghurt products. Challenges include securing the required quantity of milk of the

right quality [below the international standard of 50,000 total bacterial

count/millilitre (TBC/ML)] without delivery interruption, while avoiding being

squeezed by the bargaining power of milk farmers.

Prior to 2008, JUFO used to rely on local suppliers with herd sizes of c. 100-200

cows; subsequently, for cost-control purposes, it broadened its milk supply network

to farmers with smaller herds (of c. 10-100 cows). To ensure the quality of the raw

milk, it also worked closely with milk suppliers with agreements ranging from

contract farm management to the close supervision of the milking process.

In 2008, JUFO entered a JV with Milkes, the owner of a state-of-the-art dairy farm

that currently satisfies c. 10% of JUFO’s milk requirements. Managing its own dairy

has enabled it to meet the strict quality measures (TBC/ML of below 20,000), and it

has also been able to raise milk yield per cow through controlling the feed process:

Milkes achieves one of the highest yields in Egypt at c. 40kg/day (cf., on average,

only 2.9kg/day for other dairies); this is, however, still low compared with

international standards. JUFO plans to continue with its integration plan either by

increasing its stake in Milkes or by acquiring other targets.

Figure 27: Progression of Milkes’s yield per cow Figure 28: Egypt’s market yield per cow


Figure 29: Global annual yield per cow

Source: FAPRI World Agriculture Outlook 2011, NAEEM Research

28

31

34

37

40

08A 10A 9M11A

kg/day

2.4

2.5

2.6

2.7

2.8

2.9

08A 09A 10A 11A

kg/day

0.5 5.5 10.5 15.5 20.5 25.5

Egypt

Algeria

New Zealand

Australia

EU

US

Saudi Arabia

kg

Securing high quality raw milk is key

Milkes’ yields among highest in Egypt

14

In order to further satisfy its raw milk needs in-house, JUFO has acquired 19,500

acres of land to establish its own dairy, agriculture, fruit and cattle-feed farm, and

has planned to purchase 14,000 higher-yielding cows from countries such as New

Zealand, Germany, Portugal, and Australia over the next five years, with the first

batch of 700 cows to be received by year end.

As raw milk accounts for c. 30% of dairy COGS and c. 28% of yoghurt COGS,

securing c. 40% of its raw milk needs by 2014 through its own farms would give

JUFO an edge in controlling its raw milk prices (which are currently highly volatile).

Such self-supply should improve margins and protect it against wild margin swings

that are largely dictated by raw milk prices as illustrated in Figure 31.

Figure 30: Fresh cow milk prices fluctuating Figure 31: Milk cost and JUFO’s gross margin

Source: FAO, NAEEM Research Source: Company data, NAEEM Research

Securing concentrate for juices

Concentrates represent the main input in juice production. Therefore, to secure

supply, JUFO has again applied backward integration: it acquired concentrate

producer El-Marwa Food Industries Company in 2009, which it subsequently

supplied with new machinery. It also established a wholly owned subsidiary –

Modern Concentrate Company – in 2008 and in 2011, acquired 10,000 feddans of

land to grow its own fruit to produce concentrate. At present, c. 80% of JUFO’s

concentrate production satisfies c. 75% of its requirements for juice production (the

rest is imported), while the balance is sold to third parties. As the fruit farm matures,

the captive raw material supply should positively impact margins.

Entry of multinational players to shake up milk market

Multinational companies are keenly interested in the Egyptian FMCG sector,

attracted by the under penetration of F&B products and the size of the market.

In one sense, the entry of the larger international players into the milk market may

be beneficial in that it should grow the market size for all players and provide

momentum to the conversion rate (through introducing new value-added products

and spending on marketing and advertising campaigns to enhance consumer

awareness), as has been the case in the yoghurt segment.

Nevertheless, the entry of international heavyweights will result in JUFO’s losing

market share and increase risk of competition depressing prices. Although this was

not evidenced by the yoghurt segment, likely because of the small price difference

between loose and packaged yoghurt, the price differential is much larger in milk,

and this leaves more room for price action to gain market share.

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

98A

99A

00A

01A

02A

03A

04A

05A

06A

07A

08A

09A

10A

11A

EGP/Litre

24

26

28

30

32

34

36

38

40

42

410

460

510

560

610

660

710

760

810

07 A 08 A 09 A 10 A 11A

%EGPm

Cost of raw and powdered milk Gross margin (RHS)

Its own dairy will use high-yield cows

Self supply to help margins and

smooth cost swings

JUFO is largely self-sufficient in

concentrates

International players entering Egypt’s

dairy market

Entry of new players to stimulate

market demand…..


15

JUFO’s market share to fall

JUFO currently holds the largest market share in all dairy and yoghurt segments, and

the second-largest share in juice (after Faragello).

Figure 32: JUFO’s market share by product, 2011

Product Market share Market position

Plain milk 70% 1

Flavoured milk 74% 1

Spoonable yoghurt 30% 2

Drinkable yoghurt 73% 1

Pure juice 90% 1

Nectar juice 21% 1


Although we believe that JUFO would benefit from the backward integration, its

distribution network, and brand loyalty, we see competition intensifying going

forward with the entrance of international players.

Figure 33: JUFO’s milk market share


► In June 2009, Citadel Capital acquired Enjoy (Nile Company for Food Industries)

through its regional agri-food platform, Gozour, that also owns Dina Farms, the

largest dairy farm in Egypt, and El-Misriyeen, a key producer of white cheese

► In October 2009, Almarai acquired International Company for Agro-Industrial

Projects (Beyti), through its regional International Dairy and Juice Ltd (IDJ) JV

with PepsiCo. Almarai is to spend c. USD18m to bring Beyti to full capacity and

is targeting to control c. 50% market share by 2013

► Lactalis acquired Nestlé’s yoghurt business in Egypt and now sells under the

Lactel and Nestlé brand names

In addition, some of these players already have well-diversified business lines in

Egypt; for example, Nestlé also produces Mövenpick ice cream, Cerelac, Maggi, and

Nestlé-branded bottled water and yoghurt, among others. A player such as Nestlé

also has a sizeable distribution network already in place.

Accordingly, we forecast JUFO’s market share to decline over the next five years,

particularly in dairy, as we see tough competition, chiefly from IDJ. We estimate

JUFO’s milk market share to fall to 63% by 2016.

60

62

64

66

68

70

72

74

09A 10A 11A 12F 13F 14F 15F 16F

%

…… but JUFO market share to fall

16

Net effect of these two influences on margins

As JUFO reaps the benefits of its backward integration over the next two years, we

expect gross margin to widen by c. 200bps in 2013 and c.100 bps in 2014, to reach

36.4% and to remain relatively flat thereafter. However, with intensifying competition

from international players, we see increased operating costs negating some of the

positive effect at the EBITDA level, although we still see improvement in EBITDA

margin in 2013 and 2014. Post 2014, however, we believe the strengthening

competition (with potential price pressure) will result in lower margins at the EBITDA

level.

Figure 34: JUFO’s gross vs. EBITDA margins


18

19

20

21

22

23

24

25

32

34

36

38

40

09A 10A 11A 12F 13F 14F 15F 16F

%%

Gross margin EBITDA margin (RHS)

Margins up over 2013-2014, but

squeezed thereafter


17

Risks inherent in both raw milk and powdered

milk supply

► Raw milk prices are impacted by the movement in the prices of animal feed,

particularly corn, soya, and alfalfa

► Even with its own milk supply, JUFO still impacted by feed prices

► Powdered milk covers 20% of milk needs; expected to rise to 50%

► Shift in sales mix towards low-tier brands means more use of powdered milk

► Substitution of powdered for raw milk adds to margin pressure

► EGP deprecation is a key risk factor

As noted previously, raw materials account for 55% of JUFO’s total COGS, with 30%

of total COGS is for the cost of raw milk. JUFO is currently applying a pricing strategy

that aims to pass raw material price increases through to the end consumer, but

there is often a lag, and the pass-through is not always perfect. At times, the process

breaks down completely; for example, in 2008, milk prices rose 30%, and JUFO was

unable to pass this through – this resulted in its 2008 gross margin contracting by

1.4pps.

Other components of COGS include packaging and labour. Packaging prices are

more stable, as they are based on annual renewable agreements with TetraPak;

labour costs represent only 2% of COGS.

Raw milk pricing hostage to commodity price movements

Raw milk prices are largely impacted by the price of commodities used in animal

feed, mainly corn and alfalfa.

In an effort to reduce raw milk price volatility, JUFO has signed long-term contracts

with dairy farms to fix raw milk prices based on a price formula that is revised

quarterly reflecting movements in feed prices and seasonal factors. Nevertheless, the

volatility in feed prices still has a significant impact. While corn price started to ease

in 2012, JUFO won’t see the impact of this unless prices remain lower over the next

two months until JUFO purchases its next batch to cover the requirements for the

following six months.

Figure 35: Corn vs. milk prices

Source: Bloomberg, NAEEM Research

In 2011, gross margin dipped to 34.8% from 38.8% in 2010, impacted by an increase

in the average raw milk price from EGP2.6/kg in 2010 to EGP3.1/kg in 2011 (+19%

YoY).

105

165

225

285

345

405

465

525

585

645

No

v-0

5

Feb-0

6

May-0

6

Aug

-06

No

v-0

6

Feb-0

7

May-0

7

Aug

-07

No

v-0

7

Feb-0

8

May-0

8

Aug

-08

No

v-0

8

Feb-0

9

May-0

9

Aug

-09

No

v-0

9

Feb-1

0

May-1

0

Aug

-10

No

v-1

0

Feb-1

1

May-1

1

Aug

-11

No

v-1

1

Feb-1

2USD/ton

Corn Milk (Rebased)

Raw milk accounts for 42% of raw

material costs

Raw milk price influenced by animal

feed prices

18

We forecast raw milk prices to rise 5-7% in 2012, taking into account that they have

already increased by 7% YoY in 1Q12 to EGP2.95/kg, partially impacted by the

prevalent foot-and-mouth disease (FMD) outbreak (only 7% of raw milk supply has

so far been impacted).

JUFO’s management sees a gradual increase of c.6% in milk selling prices

throughout 2012 (JUFO raised selling prices by 2% in April).

Greater reliance on powdered milk

Powdered milk represents c. 20% of total milk raw materials used by JUFO; we

expect this percentage to gradually increase to reach 50% over the medium term,

owing to the scarcity of raw milk and the change in the sales mix towards lower-

middle income products (the bulk of sales come from Bekhero).

We also forecast the gap between milk demand and the supply of raw milk to widen

further. Cow milk production currently covers 90% of Egypt’s fluid milk consumption,

as Egyptian milking cow heads are growing relatively slow and with relatively low

yield.

JUFO also substitutes powdered milk for raw milk according to availability because

of seasonality [milk yields fall drastically (by 20%) during summer]. Thus, if the

demand for products increases significantly in the future, without the supply of raw

milk keeping up (as we expect it to), JUFO may need to adapt the formulations of all

its products, i.e. substituting raw milk with powdered milk, which would again

squeeze margins.

Figure 36: Egypt’s cow milk production and consumption Figure 37: Egyptian milking cow heads

Source: Company data, NAEEM Research Source: FAPRI World Agriculture Outlook 2011, NAEEM Research

Furthermore, as the lower-income segments in Egypt’s population shift towards the

packaged product, they are likely to prefer the low-tier brands that are offered at

prices closer to that of loose milk (i.e. at least 20% cheaper than premium packaged

milk). These products include a considerable amount of powdered milk and are

packaged using lower-quality packing materials.

Figure 38: JUFO’s milk products

Product Price premium to loose milk (%) Targeted income segment

Juhayna 20 High

Bekhero 5-9 Middle

Halibo - Low


Powdered milk prices track raw milk prices, albeit with greater volatility. On average,

over the past 10 years, powered milk prices have traded at a premium to raw milk

prices internationally. Thus, whether it being due to changes in consumption

1.45

1.50

1.55

1.60

1.65

1.70

1.75

1.80

1.85

1.90

01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A

Tons (m)

Cow milk production Fluid milk consumption

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1,590

1,610

1,630

1,650

1,670

1,690

1,710

1,730

02A 04A 06A 08A 10A 12F 14F 16F

%

No. of milk cows YoY growth (RHS)

Heads ('000s)

Lower-tier brands to see highest

demand

Powdered milk component is to rise


19

patterns (to lower-end products) or the scarcity of raw milk, the resultant use of

more powdered milk should adversely impact margins.

Forex risk

JUFO imports powdered milk from Arla Foods of Denmark and Fonterra of New

Zealand, in addition to packaging. These products are priced in USD, and therefore

JUFO faces forex risk if the EGP continues to depreciate against the dollar.

Management is trying to overcome this by actively hedging its powered milk

purchases (through auctions, forward sales or deals). NAEEM’s forecasts are for a

gradual depreciation in the EGP to 6.3 to the USD by end-2012. We believe that if

this materialises, the currency effect can be passed through, to a large extent, in the

selling price; however, if we are wrong and there is a sudden, larger devaluation of

the currency, this could have an even more severe impact on margins.

Figure 39: Powdered vs. Milk prices Figure 40: EGP depreciation against the USD

Source: Bloomberg, NAEEM Research Source: Bloomberg, NAEEM Research

200

250

300

350

400

450

500

550

600

650

Feb-0

6Jun

-06

Sep

-06

Dec-0

6M

ar-

07

Jun

-07

Sep

-07

Dec-0

7M

ar-

08

Jun

-08

Sep

-08

Dec-0

8A

pr-

09

Jul-

09

Oct-

09

Jan

-10

Ap

r-10

Jul-

10

Oct-

10

Jan

-11

Ap

r-11

Jul-

11

Oct-

11

Jan

-12

Powdered milk Milk (Rebased)

5.6

5.7

5.8

5.9

6.0

6.1

May-1

0

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar-

11

May-1

1

Jul-

11

Sep

-11

No

v-1

1

Jan

-12

Mar-

12

May-1

2

USD/EGP

Powdered milk and packaging are

priced in USD

20

DCF value of EGP5.0 per share

We have valued JUFO’s business as a whole on a discounted cash flow (DCF) basis,

but have also provided a comparable multiple analysis with global peers.

Our DCF valuation indicates a fair value of EGP5.0. Meanwhile, JUFO trades at a 41%

discount to emerging market peers on a P/E basis (2013E) and at a 53% discount on

an EV/EBITDA basis (2013E).

Although we see JUFO recording strong revenue growth over our forecast period

(even despite projected market share loss), we are more conservative on margins

than is market consensus. We expect gross margin to rise through 2013 and 2014, as

JUFO benefits from backward integration (i.e. owning its own dairy farm and fruit

plantation). We believe, however, that margin improvement will be more subdued at

the EBITDA level, given the cost pressures associated with rising competition and the

challenges of managing a more complex organisation. Post 2014, we forecast gross

margin to remain stable, but the EBITDA margin to see a gradual decline through

the remainder of the forecast period.

The net effect of these influences is still for JUFO to generate a forecast 2012-16 EPS

CAGR of 26%. With the share currently trading at a P/E of 10x 2013E, its PEG ratio is

attractive cf. the peer group’s at just 0.3x.

Note, however, that our DCF valuation does not reflect any assumption of a likely

fine by the Egyptian Competition Authority for anti-competitive behaviour. In a

worst-case scenario, where the maximum fine (EGP300m) is levied, this would lower

our fair value by 8% to EGP4.6.

Catalysts to the upside:

► Faster conversion to packaged products

► Flexibility to pass any increase in input cost to end user

► Easing in global soft commodity prices

► Backward integration succeeding in improving margins more than we expected

► A favourable court decision regarding monopolistic practices

Potential risks:

► A more rapid depreciation of the EGP

► A slower path taken by the conversion assumption

► Failure to satisfy 40-50% of its raw material needs internally by 2015

► Tougher competition

► An unfavourable outcome in the monopoly lawsuit

DCF valuation

Using a WACC of 15.5%, our DCF valuation arrives at a fair value of EGP5.0 per share

(taken as our target price), which offers an upside potential of 18%. Our DCF model’s

forecast period was run through to 2019 to account for the tax holidays granted to

several of JUFO’s operating subsidiaries ending in 2018, which would result in a

spike in the effective tax rate. We have assumed perpetual growth in the terminal

period of 4%.

A DCF-based fair value of

EGP5.0/share

Trades at substantial discount to

peers on P/E basis

We used a WACC of 15.5% and LTG

of 4%


21

Figure 41: Assumptions for WACC calculation

Assumption

Risk-free rate of return 12.0%

Pre-tax cost of debt 13.0%

Equity risk premium 7.0%

Beta 0.86

Tax rate 25.0%

Target debt weighting 30.0%

Target equity weighting 70.0%

Cost of equity 18.0%

WACC 15.5%

Figure 42: Sensitivity analysis – value per share

WA

CC

Terminal growth rate

5.0 14.5% 15.0% 15.5% 16.0% 16.5%

3.0% 5.4 5.0 4.7 4.4 4.1

3.5% 5.5 5.2 4.9 4.5 4.3

4.0% 5.8 5.4 5.0 4.7 4.4

4.5% 6.0 5.6 5.2 4.9 4.5

5.0% 6.2 5.8 5.4 5.0 4.7

Relative valuation

We also compared JUFO with selected global peers in the dairy and juice sectors.

However, as growth rates in the FMCG sector, including in the consumption of dairy,

yoghurt, and juice, differ between developed and developing regions, we have

broken the analysis down to developed country and developing country peers. JUFO

currently trades at a 2013E P/E of 9.6x, a 41% discount to the developing country

peer average of 16.4x, and also trades at a substantial discount on a 2013E

EV/EBITDA basis (5.0x versus 10.8x). This, despite JUFO’s superior earnings growth

(PEG of 0.3x). We believe that the discount is, to a large extent, a function of

perceived risk in Egypt rather than of JUFO’s fundamentals. We therefore believe

that as Egypt’s future become clearer post the presidential elections, JUFO’s share

will rerate towards peer averages. This implies attractive upside for the share.

Large discounts to developing

markets’ peers on P/E and EV/EBITDA

basis

22

Figure 43: Comparable valuation

Company name Country

Market cap. P/E EV/EBITDA

(USDm) 12f 13f 12f 13f

Developed

Nestlé Sa-Reg Switzerland 188,732 16.7 15.4 11.5 10.7

Danone France 41,482 16.3 14.8 10.8 10.0

Saputo Inc. Canada 8,168 17.2 15.7 10.7 10.1

Parmalat Spa Italy 3,511 14.6 13.7 3.5 3.4

Dean Foods Co. United States 2,804 13.1 11.6 7.5 7.2

GlanbiaPlc Ireland 2,065 11.5 10.4 9.0 8.4

Emmi Ag-Reg Switzerland 1,001 10.3 9.8 5.9 5.8

Morinaga Milk Industry Co. Japan 920 15.2 10.5 5.2 5.0

Dairy Crest Group Plc Great Britain 653 6.5 6.6 5.3 5.4

Developed markets average 13.5 12.1 7.7 7.3

Developing

Nestle India Ltd India 7,638 37.4 30.8 23.3 19.1

AlmaraiCo. Ltd Saudi Arabia 7,306 18.3 15.5 14.4 12.0

Inner Mongolia Yili Indus-A China 5,700 18.2 14.7 10.8 8.9

China Mengniu Dairy Co. Hong Kong 4,736 17.2 13.3 8.0 6.4

Nestlé (Malaysia) Berhad Malaysia 3,923 25.3 23.7 17.3 16.3

Vietnam Dairy Products Jsc Vietnam 2,332 9.8 7.3 7.1 5.3

Bright Dairy & Food Company Ltd-A China 1,639 35.1 26.3 22.5 19.9

Yashili International Holding China 594 10.7 10.4 1.9 1.8

Saudi Dairy & Foodstuff Co. Saudi Arabia 485 12.7 12.1 9.2 8.9

Pinar Sut Mamulleri Sanavii Turkey 399 9.7 19.4 9.4 8.0

Developing markets average 19.4 16.4 12.6 10.8

Overall average 16.6 14.3 10.3 9.2

JUFO Egypt 501 13.2 9.6 6.6 5.0

Source: Bloomberg, NAEEM estimates

Litigation

In March 2010, the Egyptian Competition Authority (ECA) accused JUFO, Beyti, and

Enjoy of carrying out monopolistic activities by manipulating milk prices by

purchasing raw milk at a marginal discount to the fair market price, which is in

violation of Egyptian Competition Law.

According to JUFO, this issue dates back to 2001 when the Ministry of Agriculture

formed a committee (comprising milk producers and suppliers) for pricing raw milk.

In 2005, the Ministry of Trade and Industry issued a law that prohibited suppliers

and producers from colluding to fix prices, which appeared to be in direct

contradiction to the Ministry of Agriculture’s instructions to set prices through the

pricing committee. On several occasions thereafter, JUFO requested a clarification

from both ministries, but received no response. In 2010, it withdrew from

participating in the pricing committee, in accordance with the Ministry of Trade and

Industry’s law.

In November 2011, the Egyptian Competition Authority (ECA) referred the case to

the public prosecutor. JUFO believes it has a strong case, in that it had been required

by the Ministry of Agriculture to set prices through the committee. Nevertheless,

according to Egypt’s anti-trust law, the fine for violations range between a minimum

of EGP100k and a maximum of EGP300m. The maximum value represents 47% of

JUFO’s current cash balance. Our gut feel is that there will, in the end, be a

compromise, but given the current uncertain political environment in Egypt and the

fact that the new minister will have larger national issues on his plate, a final

outcome may be over a year away. In a worst-case scenario (JUFO’s being required

to pay EGP300m), this would depress our target price by 8% to EGP4.6.

Litigation over uncompetitive

practices still ongoing…..

…… but could be held in court for

years


23

Appendix 1: Historical and forecast KPIs

2009A 2010A 2011E 2012F 2013F 2014F 2015F 2016F 5y Average

Dairy

Milk market size ('000 tons) 1,515 1,498 1,641 1,723 1,818 1,918 2,033 2,155

% growth (YoY) 5.1% -1.1% 9.5% 5.0% 5.5% 5.5% 6.0% 6.0% 5.6%

Packaged milk market size ('000 tons) 162 195 214 246 290 346 410 483

% growth (YoY) 13.3% 20.4% 9.7% 15.0% 18.0% 19.0% 18.5% 18.0% 17.7%

Conversion rate (packaged/total) 10.7% 13.0% 13.0% 14.3% 16.0% 18.0% 20.1% 22.4% 18.2%

Milk blended local market share 73% 72.3% 70.5% 70.2% 67.9% 65.8% 64.5% 62.8%

Quantity ('000 tons) 158 171 169 192 219 253 293 337

% growth (YoY) -3.5% 8.5% -1.2% 13.4% 14.0% 15.4% 16.1% 15.0% 14.8%

ASP (EGP) 5,742 6,048 6,700 7,107 7,498 7,723 7,877 7,995

Dairy revenue 907 1,037 1,135 1,365 1,642 1,951 2,311 2,697

Dairy gross margin 31.1% 30.6% 25.8% 25.6% 27.2% 28.6% 29.2% 29.5%

Dairy EBITDA margin 17.7% 17.1% 10.3% 10.1% 11.4% 12.2% 11.8% 11.5%

Yogurt

Packaged yogurt market size ('000 tons) 97 116 156 179 208 246 290 336

% growth (YoY) 32.9% 19.6% 34.5% 15.0% 16.0% 18.0% 18.0% 16.0% 16.6%

Yogurt blended market share 43.5% 37.8% 39.2% 43.1% 44.5% 44.5% 44.2% 44.2%

Quantity ('000 tons) 42 44 61 77 93 109 128 148

% growth (YoY) 34.2% 4.0% 39.5% 26.2% 20.0% 18.0% 17.0% 16.0% 19.4%

ASP (EGP) 8,626 9,151 10,027 9,984 10,383 10,850 11,393 11,962

Yogurt revenue 364 402 614 771 962 1,187 1,458 1,776

Yogurt gross margin 38.1% 36.8% 34.6% 33.4% 33.8% 34.1% 34.6% 34.8%

Yogurt EBITDA margin 19.2% 19.8% 16.9% 16.2% 16.9% 17.3% 17.0% 17.1%

Juices

Packaged milk market size ('000 tons) 217 294 351 404 470 554 654 765

% growth (YoY) 19.2% 35.5% 19.4% 15.0% 16.4% 18.0% 18.0% 17.0% 16.9%

Juice blended local market share 22.6% 22.1% 19.1% 19.8% 19.9% 19.4% 18.6% 18.0%

Quantity ('000 tons) 49 65 67 80 93 108 121 138

% growth (YoY) 1.9% 32.6% 3.2% 18.9% 17.0% 15.0% 13.0% 13.5% 15.5%

ASP (EGP) 5,840 5,904 6,264 6,283 6,396 6,652 6,885 7,091

Juice revenue 287 384 421 502 598 715 836 978

Juice gross margin 33.7% 32.2% 27.0% 26.2% 27.6% 28.5% 29.4% 29.7%

Juice EBITDA margin 18.3% 12.3% 10.4% 9.9% 10.6% 11.3% 11.4% 11.2%

Concentrates

Quantity ('000 tons) 4 6 7 8 9 10 10 11

% growth (YoY) 35.4% 52.0% 19.0% 9.8% 15.0% 10.0% 8.0% 8.0% 10.2%

ASP (EGP) 5,132 6,603 6,409 7,483 7,296 7,405 7,590 7,818

Concentrates revenue 20 39 45 58 64 72 80 89

Concentrates gross margin -18.9% -16.3% 14.6% 14.0% 14.5% 14.8% 15.0% 15.5%

Concentrates EBITDA margin -38.4% -30.1% 12.2% 12.0% 13.0% 13.6% 14.0% 14.2%

Agriculture

Quantity ('000 tons) 0 0 20 51 59 69 81 97

% growth (YoY) - - nm 157.3% 15.0% 16.0% 18.0% 20.0% 45.3%

ASP (EGP) 0 0 0 1,452 729 766 804 844

Agriculture revenue 0 0 0 29 38 45 55 68

Agriculture gross margin - - 34.6% 25.8% 30.8% 31.9% 32.6% 33.2%

Agriculture EBITDA margin - - 15.7% 7.2% 12.8% 15.9% 16.1% 16.2%

Overall revenue 1,578 1,861 2,215 2,725 3,304 3,971 4,740 5,608

% growth (YoY) 7.9% 18.0% 19.0% 23.0% 21.3% 20.2% 19.4% 18.3%

Overall gross margin 32.5% 31.3% 28.3% 27.6% 29.0% 30.0% 30.7% 31.0%

Overall EBITDA margin 24.9% 23.1% 18.8% 45.4% 19.7% 20.0% 19.3% 18.7%

24

Appendix 2: JUFO’s summary financials

Income statement (EGPm) 2010A 2011A 2012F 2013F 2014F 2015F

Revenue 1,875 2,251 2,742 3,322 3,991 4,764

COGS (1,152) (1,470) (1,809) (2,137) (2,541) (3,023)

Gross profit 723 781 932 1,185 1,450 1,740

SG&A (293 (360) (433 (533) (652) (821)

EBITDA 429 421 499 652 798 919

Depreciation and amortisation (126) (139) (169 (215) (245) (271)

EBIT 303 282 331 438 553 649

Net provisions (4) (1) 0 0 0 0

Others 16 (34) (16) (12) (11) (10)

Net finance costs (59) (39) (69) (81) (79) (79)

Net profit before tax 255 209 246 345 464 559

Income taxes (28) (23) (19) (33) (54) (64)

Net profit after tax 228 186 227 313 410 496

Exceptional items 0 0 0 0 0 0

Net profit after exceptional items 228 186 227 313 410 496

Minority interest 0 0 0 0 1 1

Net profit 228 186 227 312 409 494

Basic EPS 0.30 0.20 0.32 0.44 0.58 0.70

Balance sheet (EGPm) 2010A 2011A 2012F 2013F 2014F 2015F

Cash and cash equivalents 724 688 504 469 632 803

Receivables and debtors (net) 300 189 302 300 320 383

Inventory 280 397 410 497 478 570

Other current assets 0 3 0 0 0 0

Total current assets 1,303 1,278 1,216 1,266 1,430 1,757

Fixed assets (net) 1,151 1,329 1,974 2,205 2,342 2,393

Projects under construction 138 214 150 105 73 51

Intangible assets 97 97 97 97 97 97

Other long-term assets 39 43 43 43 43 43

Total assets 2,728 2,961 3,481 3,716 3,985 4,342

Short-term debt 377 647 629 732 710 806

Trade payables and creditors 217 149 181 299 330 393

Other current liabilities 29 20 20 20 20 20

Total current liabilities 623 816 831 1,052 1,061 1,220

Long-term debt 384 252 530 404 500 500

Other non-current liabilities 77 81 81 81 81 81

Total non-current liabilities 461 334 611 485 581 581

Shareholders' equity 1,643 1,812 2,039 2,180 2,344 2,544

Minority interest 0 0 0 0 -1 -3

Total liabs. and shareholders' equity 2,728 2,961 3,481 3,716 3,985 4,342

Cash flow statement (EGPm) 2010A 2011A 2012F 2013F 2014F 2015F

NOPLAT 354 325 396 527 654 766

Non-cash items 38 19 0 0 0 0

Gross cash flow 392 343 396 527 654 766

Change in operating working capital -77 -165 -93 33 30 -93

Operating FCF 315 178 303 560 685 673

Capital expenditure -288 -404 -750 -400 -350 -300

Change in projects under construction - - - - - -

Change in other assets (net) - - - - - -

Free cash flow 27 (226) (447) 160 335 373


25

Key ratios and indicators 2010A 2011A 2012F 2013F 2014F 2015F

Profitability ratios

Revenue growth (%) 17.3 20.0 21.8 21.2 20.1 19.4

Gross margin (%) 38.5 34.7 34.0 35.7 36.3 36.5

EBITDA margin (%) 22.9 18.7 18.2 19.6 20.0 19.3

Net margin (%) 12.1 8.3 8.3 9.4 10.2 10.4

EPSG (%) (57.8) (32.4) 58.6 37.6 31.2 20.9

ROAE (%) 20.5 10.8 11.8 14.8 18.1 20.2

Liquidity ratios

Current ratio (x) 2.1 1.6 1.5 1.2 1.3 1.4

Quick ratio (x) 1.6 1.1 1.0 0.7 0.9 1.0

Efficiency ratios

Receivables DOH (days) 46 40 33 33 28 27

Inventory DOH (days) 80 84 81 77 70 63

Payables DOH (days) 63 45 33 41 45 44

Cash conversion cycle (days) 63 78 81 70 53 47

Debt ratios

Net debt/Equity (x) 0.02 0.12 0.32 0.31 0.25 0.20

Net debt/EBITDA (x) 1.17 0.29 0.87 1.01 0.78 0.59

Interest coverage ratio (x) 5.1 7.3 4.8 5.4 7.0 8.2

Other key ratios

PE (x) 14.2 21.0 13.2 9.6 7.3 6.1

PB (x) 1.6 1.7 1.5 1.4 1.3 1.2

EV/EBITDA (x) 7.7 7.8 6.6 5.0 4.1 3.6

P/CFPS (x) 6.7 8.8 7.6 5.7 4.6 3.9

PEG (x) - - 0.3 0.3 0.3 0.3

Dividend payout ratio (%) 0 74 0 55 60 60

Dividend yield (%) nm 3.5 nm 6.5 9.3 11.3

Financial summary

JUFO currently has EGP928m of total debt and EGP643m of cash on its balance

sheet: a net debt of EGP285m. Total debt is forecast to rise to EGP1.2bn by year-end

2012.

Its net debt/equity ratio is estimated at 0.32x in 2012, up from 0.12x in 2011, post

signing a loan contract with the Commercial International Bank (CIB) totalling

EGP300m, to be used partially to finance the construction, building, production, and

filling lines of its new yoghurt plant “Egyfood”.

It spent EGP400m in capex in 2011 and has assigned EGP750m in 2012 for

rebuilding its yoghurt plant, continuing its backward integration programme, and

expanding its distribution network.

The company’s average effective tax rate has been just 7% over the past three years,

as it enjoys a tax holiday on the production of some of its factories; this will be

terminated by 2018.

In 2011, JUFO started paying dividends for the first time, with a payout ratio of 57%,

despite declaring in its IPO prospectus that it did not expect to pay dividends in

2010 and 2011. Given this statement and the capex demands this year, we assume

that it will not pay dividends in 2012, but will resume doing so in 2013 with a payout

ratio of 55%.

26

Disclosure Appendix

Disclaimer

This report is based on publicly available information. It is not intended as an offer to buy or sell, nor is it a solicitation of an offer to buy or sell

the securities mentioned. The information and opinions in this report were prepared by the NAEEM Research Department (“NAEEM”) from

sources it believed to be reliable at the time of publication. NAEEM accepts no liability or legal responsibility for losses or damages incurred

from the use of this publication or its contents. NAEEM has the right to change opinions expressed in this report without prior notice.

This research report (including all appendices) contains information that is intended to be conveyed only to the intended recipients, which

insofar as the United Sates is concerned, are “major U.S. institutional investors” (i.e., U.S. institutional investors having total assets under

management in excess of USD100 million, or investment advisers that are registered with the U.S. Securities and Exchange Commission and

have total assets under management in excess of USD100 million). If the reader or recipient of this research report is not the intended recipient,

please notify NAEEM immediately, and promptly destroy this research report without retaining any portion in any manner. The unauthorized

use, dissemination, distribution or reproduction of this research report by any person other than the intended recipient is strictly prohibited.

Analyst Certification

The primary research analyst/analysts covering the company (or companies) mentioned in this report certify that their views about the company

(or companies) and their securities are accurately expressed. Further, no part of their compensation, whether pecuniary or in-kind, was, is, or will

be, directly or indirectly related to the recommendations or views expressed in this research report. Unless otherwise stated, individuals listed on

the front cover/page of the report are the research analysts.

Stock Ratings

NAAEM believes that an investor’s decision to buy or sell a stock should depend on individual circumstances (including, but not limited to the

investor’s existing holdings and financial standing) and other considerations. Different securities firms use a range of rating terms and rating

systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each report. In addition, since

NAEEM’s research reports contain complete information about the analyst’s views, investors should read NAEEM reports in their entirety, and

not infer the contents from the ratings alone. Ratings (and/or research) should not be relied upon as an investment advice.

NAEEM assigns ratings to stocks on the following basis:

Rating Upside/Downside potential 2201 May 31Rating distribution as of

BUY >20% 56%

ACCUMULATE >10% to 20% 13%

HOLD +10% to -10% 28%

REDUCE

Documents

Got milk? BUYcontent.argaam.com.s3-external-3.amazonaws.com/877b4e39-c533-… · Got milk? * – BUY JUFO is Egypt’s leading producer of dairy products and its shares provide direct