Arabian Food Industries (Domty) [DOMT]: Putting Bread on the Table
A diversification story underway; initiate at OW/M
Arabian Food Industries (Domty) [DOMT]
Egypt / Food & Beverages / Core Coverage Report
12M PT: EGP8.7
(+79%) set on 24 Aug 2022
Investment Rating: Overweight | Risk Rating: Medium
Key Insights
A cheese producer looking for diversification:
Arabian Food Industries (Domty) [DOMT] is one of the two biggest cheese producers, with a market share above 40%. However, the hopes to acquire a larger market share opened the door to dive in into the juice and milk as well as the bakery markets. DOMT tapped the bakery market in Q3 2018 then managed to almost double its utilization rate to 72% in 2021. However, we expect utilization rate to settle at 58% by 2026 in view of additional capacity coming on line. By end of 2026, we believe DOMT’s revenue mix will stabilize at 64% cheese, 27% bakery, and 9% juice and milk.
More control over its channel marketing:
In 2021, DOMT decided to phase out its cheese distribution agents, which was a positive move. Indeed, its cash conversion cycle (CCC) has been on a declining trend over the past three years (2019-21). This helped DOMT gain more control over its channels. In Q1 2022, DOMT reported the highest revenue growth since 2017, generating revenues of EGP1.1bn (+73% y/y).
Founder-led offer could be long-term positive catalyst:
An offer to acquire a 34% stake in DOMT at EGP5/share by Expedition Investments (partly owned by DOMT’s founder) was launched on 18 August and will run through 14 September. The offer was initially priced at a 25% premium to the market before the stock rallied but is a potential positive in the long term.
Valuation, Investment Thesis, & Risks
Overweight / Medium Risk, 12MPT EGP8.7/share (+79%):
We valued DOMT using the discounted cash flow approach which produced a fair value of EGP7.3/share and a 12MPT of EGP8.7/share, offering an upside potential of 79% and hence our Overweight rating. DOMT had been affected in H1 2021 by the phasing out of its cheese distribution agents, before it started to slightly recover in H2 2021. Meanwhile, we expect DOMT’s earnings to grow at a 5y CAGR (2021-26) of 16%.
Investment thesis:
Solid cheese market share, with plans to have their own distribution channels. A diversified revenue stream with bakery, its newest venture, coming in second in terms of revenue contribution. A consistent dividend payer that is expected to maintain its payout for the last three years.
Key risks:
Competition from new entrants offering lower-priced products. Worldwide increases in SMP prices besides all raw materials in general. Any EGP devaluation would lead to a higher SMP cost and potentially lower margins. All three risks together may force DOMT to hike its selling prices, which may impact volumes negatively. If Expedition Investments’ offer is successful, DOMT’s free float may decline to only 10%, which can reduce the stock’s trading liquidity.
Nouran Ahmed
Equity Analyst
T +202 3300 5727
 | A guest post by
|