Obour Land for Food Industries [OLFI]: A Play on Consumption Recovery
Profitable growth through diversification
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Obour Land for Food Industries [OLFI]
Egypt / Food & Beverages / Core Coverage Report
12MPT: EGP8.6 (+51%)
set on 26 Dec2021
Investment Rating: overweight | Risk Rating
Key Insights
Cheese giant
Obour Land for Food Industries [OLFI] is a leading cheese maker possessing the biggest slice of the white cheese pie in Egypt (42%). Geared up by its strong market position, OLFI ventured lately into the milk segment to diversify its revenue mix.
A diversified top line
OLFI’s invested EGP255mn to penetrate the milk segment in 2017. Currently owning a farm that should be fully operational in 2022, OLFI is setting up its milk production to stand on solid ground competing in a market dominated by one player with a 60% market share, namely Juhayna Food Industries [JUFO]. We believe the move should be blissful to OLFI’s strategy and financials, helping diversify OLFI’s revenues and ensuring more sustainable growth.
Key strength points
We believe OLFI has got several strength points that would help it maintain its growth profile and attractive positioning. OLFI has got a healthy cash collection policy, keeping its working capital at sustained levels. Moreover, OLFI’s dividend policy of an average of 50% payout ratio should serve investors’ two investment objectives: the return of investment while maintaining growth prospects. Lastly, OLFI maintains a very low debt/equity ratio, ensuring a healthy balance sheet.
Valuation, Investment Thesis, & Risks
Overweight/Medium Risk, 12M PT EGP8.6/share (+51%)
We valued OLFI using discounted cash flow approach which produced a fair value of EGP7.4/share and a 12-month price target of EGP8.6/share, hence our Overweight rating. OLFI’s stock has been in a downward spiral, dropping 30% since February 2021. Our 12M PT offers an upside potential of 51%. The stock trades at a 2021e P/E of only 6.8x, which appears even more attractive when compared to OLFI’s 5-year earnings CAGR (2020-2025) of 10%.
Investment thesis
Dominant cheese player, with solid sales and distribution channels. Diversifying revenue stream sources by venturing into milk and juice segments. Strong cash policy which would maintain OLFI’s liquidity position. Debt is sustained within healthy limits.
Risks
Lower-than-expected growth rates in the milk segment which would translate into a sub-par ROI, especially within a saturated market dominated by one player. Growth is limited to expansions in the cheese market, so the lack of greenfield investments could stifle OLFI’s growth rates compared to its peers. Moreover, OLFI’s business model is highly sensitive to prices of key production inputs, such as Skim Milk Powder (SMP), which is priced in foreign currencies. Thus, any increase in SMP would expose OLFI to both higher production cost and FX risk.
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Sherif El Etr
Equity Analyst
T +202 3300 5720