Obour Land for Food Industries [OLFI] - Wise and Clever
Cost control is OLFI’s secret sauce; OW/M maintained
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Obour Land for Food Industries [OLFI]
Egypt / Consumer Staples / Core Coverage Update
12M PT: EGP9.2 (+47%, was 8.6)
set on 14 Nov. 2022
Investment Rating: Overweight | Risk Rating: Medium
Obour Land Food Industries [OLFI] has a leading market share of c.42% in Egypt’s EGP7bn white cheese market. Despite OLFI’s diversification attempts, white cheese still captures c.95% of top line, while milk and juice together contribute c.5%. We upgrade our 12MPT for OLFI from EGP8.6/share to EGP9.2/share on: (1) absorbing additional share in the white cheese market, (2) launch of “Obour Farm” in 2023, and (3) a weaker EGP.
Gaining new ground in the white cheese market
Unlike OLFI, white cheese smaller producers were hit hard with higher skim milk powder (SMP) prices due to the Russia-Ukraine war, forcing some of them to exit the market. This left room for big players, such as OLFI which upped its utilization rate, to gain higher market shares in the saturated white cheese market. In Q3 2022, OLFI’s white cheese revenues reached their highest quarterly level at EGP1.27bn, with a contribution of 95%. We expect white cheese revenues to reach EGP5.5bn by 2026, implying a 5y CAGR of 15%. On the back of our assumption of higher prices to be the main driver for revenue growth at a 5y CAGR of 11.4%. Recently, OLFI faced an operational lapse in white cheese production due to a shortage in palm oil supply. However, OLFI expects the release of a palm oil shipment that will cover c.3 weeks of production. Still, OLFI faces the risk of production interruption due to raw materials shortage.
The future of milk and juice
Through 9M 2022, OLFI increased milk prices but decreased juice prices. Higher milk prices influenced sales volumes negatively, reaching 8.8mn kg (-18% y/y) in 9M 2022. However, lower juice prices increased sales volumes significantly to 6.3mn kg (+101% y/y) in 9M 2022. We project milk revenues to grow at a 5y CAGR of 18%, capturing 7% of total revenues by end of 2026. Meanwhile, we expect juice revenues to grow at a 5y CAGR of 12%, albeit representing only 1.1% of total revenues by 2026.
Steadily increasing revenues while managing costs
Since the onset of the pandemic in 2020, OLFI’s revenues grew at a 2y CAGR (2019-21) of 7.8% due to: (1) cleverly keeping debt at low levels, thus limiting finance expenses and (2) negotiating SMP contracts at better prices. OLFI’s quarterly revenues surged through the last five quarters, achieving an all-time revenue high in Q3 2022 at EGP1.3bn (+64% y/y). This remarkable revenue expansion was due to growth in both sales volumes and prices in the cheese segment. We note that prices grew 33% ytd, and we expect prices to be 40% higher y/y in Q4 2022. Although SMP is still the core raw material for white cheese, OLFI overcame the war-induced high prices by partially substituting it with raw milk. OLFI will launch its “Obour Farm” in Q2/Q3 2023, aiming to guarantee c.30-40% of its raw milk needs; thus decreasing costs. According to management, OLFI is expected to sign a contract to import its first shipment of cattle before the end of 2022.
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Nouran Ahmed
Equity Analyst
T +202 3300 5727
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