Arabian Food Industries - Domty - Initiation of Coverage - October 2016

PRIME INVESTMENT RESEARCH

FOOD & BEVERAGE |EGYPT ARABIAN FOOD INDUSTRIES – DOMTY – INITIATION OF COVERAGE OCTOBER 9TH

2016

ARABIAN FOOD INDUSTRIES – DOMTY … POISED FOR FURTHER GROWTH IN THE COMING YEARS BACKED BY PRODUCT INNOVATION &

NEW SEGMENTS S

Stock Data Outstanding Shares [Mn] 282.6 Mkt. Cap [Bn] 1.619 Bloomberg – Reuters DOMT EY, DOMT.CA LOW/HIGH - SINCE INCEPTION 5.8 – 10.64 DAILY AVERAGE TURNOVER (‘000S) 9,586.8

Ownership El Damaty Family 29.5% Yehia Ben Laden 15.7% Trevi Holding 11.5% Free Float 43.4% ource: GB AUTO, Prime Estimates

“BUY” MARKET PRICE EGP 5.80 FAIR VALUE EGP 6.75 POTENTIAL 16% UPSIDE

INVESTMENT GRADE “GROWTH”

Report Content: Valuation ………………………………….……. 2 The Egyptian Food & Beverage Sector ……….. 6 The Egyptian Cheese Industry ……………...…... 9 The Egyptian Juice Industry ……………………. 12 Arabian Food Industries ………………….…….. 14

Source: Bloomberg

We initiate our coverage for Arabian Food Industries - Domty - with a “Buy” rating driven from a upside potential of 16%; driven from our estimated Fair Value of EGP 6.75 /share Using the DCF valuation methodology for Domty, we utilized an average WACC over our forecasted horizon of 15.60%, a risk free rate of 13.14%, and a market risk premium of 8%. We used the average F&B Sector Beta which is equivalent to 0.6. Currently, the stock is being traded at a discount to its global and local peers. The company has been trading at a 2016 P/E of 19.96x, where 2016 P/E for the global and local peers stood at 26.50x and 29.57x respectively. Domty’s valuation is affected by 2 main factors; the post-tax risk free rate and the minimal CAPEX expenditure. Since the beginning of 2016, the returns on all government securities skyrocketed, making most of the stocks seem unappealing to investors. The 1-year post-tax risk free rate rose by 352bps, reaching 13.14% during October 2016. Using the current post-tax risk free rate - 13.14% - DOMT would be valued at EGP 6.75/share, where if the post-tax risk free rate of January 2016 – 9.62% - were used, DOMT would be valued at EGP 10.23/share. On the other hand, the minimal CAPEX expenditure is quiet positive for the stock’s valuation. We believe that the company would incur EGP 480mn as CAPEX expenditure over 2016-2020. This is relatively low compared to the company’s competitors, as Domty enjoys benefits as being Tetra Pak’s largest packaged white cheese producer. Tetra Pak allows Domty to purchase new machines on preferential terms, which typically include payment in non-interest bearing installments over several years that can be offset against receivables, resulting in no actual cash outflow. We believe that during the coming years, the company’s CAPEX would be directed towards expanding the distribution fleet, capacity expansions in the carton pack cheese and juice segments, the company’s new segments and the geographical expansions.

FX risk is considered one of the biggest threats for Domty, whether regarding the FX availability or the FX pricing. In 2015, nearly half of the company’s raw materials were denominated in FX, where the non-EGP revenues covered only 8-10% of the required FX. Till May 2016, the company was able to secure its entire FX requirements from the official banking system; however starting June the company had to resort to the parallel market. The company secured 90% of its required FX from the parallel market at a rate of 12.6-12.7 EGP/USD, where the remaining 10% was sourced from the banking system at the official rate. The company would have a negative exposure to further EGP devaluation, as most of the F&B producers.

Domty is a leading food and beverage company in Egypt and the leading cheese producer, selling a variety of packaged, processed and unprocessed cheese, as well as a range of juice products. The company began operations in 1990 and pioneered the production of packaged white cheese in Egypt. Ever since, Domty has become a household name and it currently holds the #1 market position in the Egyptian cheese market. The company’s market position in the total packaged cheese market in Egypt as of September 30th, 2015 stood at 40%, where it had a leading market position across the various product categories. Since 2012, Domty has been recognized as the world’s largest producer of Tetra Pak packaged white cheese, making it enjoy special technical and financial benefits from Tetra Pak. These benefits include preferential terms on the purchase of new machines and packaging materials. Also, it receives special maintenance and support and it has a maintenance capital expenditure agreement, where it receives significant annual marketing support from Tetra Pak based on a percentage of the marketing budget. In 2013, the company decided to penetrate the juice industry and it has been quiet successful. In less than 2 years, Domty was able to capture c7% of the entire Egyptian juice market, becoming the fifth largest producer by volume. The company intends to expand into other market segments in the coming few years, such as cheese sandwich, hard cheese, flavored milk, whipping cream and custard.

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DOMT EGX 30 - Rebased

Source: Bloomberg

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PRIME INVESTMENT RESEARCH ARABIAN FOOD INDUSTRIES – DOMTY – INITIATION OF COVERAGE

OCTOBER, 2016

The company exports its products to more than 35 countries. In 2015, Domty entered into an agreement to begin exporting cheese to Russia, benefiting from the supply shortages resulting from the foreign sanctions against Russia. The first deal was made in 2015 and it amounted to USD 20mn. In 2016, the company reached two new agreements to market its products in Russia, where each agreement had a value of USD 10mn. The three agreements have a total value of USD 40mn. These agreements are of huge importance, as they will enable the company to secure much of the required FX to import raw materials.

Valuation: We initiate our coverage for Arabian Food Industries - Domty - with a “Buy” rating driven from a upside potential of 16%; driven from our estimated Fair Value of EGP 6.75 /share Using the DCF valuation methodology for Domty, we utilized an average WACC over our forecasted horizon of 15.60%, a risk free rate of 13.14%, and a market risk premium of 8%. We used the average F&B Sector Beta which is equivalent to 0.6.

Discounted Cash Flow Model (DCF) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

NOPLAT

156,137 104,607 148,125 273,308 373,208

Depreciation

22,950 36,094 38,820 47,370 55,021

Gross Cash Flow

179,087 140,701 186,945 320,678 428,229

Change in Working Capital

-36,390 -62,228 -20,941 -108,383 -18,685

Capex

-157,500 -28,671 -100,694 -90,581 -101,916

Free Cash Flow

-14,803 49,802 65,309 121,714 307,628 332,238 358,817 387,522 418,524 452,006

Terminal Value

4,578,837

Total Cash Flow

-14,803 49,802 65,309 121,714 307,628 332,238 358,817 387,522 418,524 5,030,843

NPV

-14,307 41,631 47,333 76,491 167,985 157,260 147,220 137,821 128,972 1,343,819

Value Of Operations 2,234,226

Add: Excess Cash 28,069

Entity Value 2,262,295

Less: Value of Debt 354,492

Less: Accum. Discounted Minority Interest

67

Shareholder Value 1,907,737

DCF Value Per Share 6.75

We believe that a multiple-stage growth model is more appropriate for sectors such as F&B and companies as Domty, as these sectors and companies are expected to witness abnormal growth rates before achieving stable perpetual growth rates. Previously, we indicated that our assumed perpetual growth rate is capped by 5%, as it is correlated with Egypt’s real GDP growth rate, and hence we opted to apply a multiple stage growth rate model for Domty.

Hyper Growth Stage

High Growth Stage

8% Sustainable

Growth 5%

2016-2020 2021-2025 2026-Infinity

Regarding the perpetual growth rate, we applied a multiple-stage growth model:

- 2016 - 2020: we forecasted full financial statements, as the company will witness hyper growth rates.

- 2021 - 2025: we assumed FCF to grow at a high rate of 8%.

- 2026 - Infinity: the terminal value of the company is based on a perpetual growth rate of 5%.

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OCTOBER, 2016

SOURCE: BLOOMBERG & PRIME ESTIMATES

The DCF Valuation for Domty is relatively appealing as it entails an upside potential of 16%. Moreover, Peer Valuation would imply that Domty is considered relatively undervalued and is currently trading at a discount. Domty has a lower leading P/E ratio (19.96x) than its global (26.50x) and local peers (29.57x). Using the leading P/E multiple for global peers, Domty’s FV would stand at EGP 7.68, implying a 32% upside potential.

Company Name P/E - 2015 P/E - 2016 P/B 2015 P/B 2016

Local F&B Edita Food Industries 32.3 32.3 10.15 10.15

Juhayna Food Industries 26.85 26.85 3.1 3.1

Sample Median - Local F&B 29.57 29.57 6.62 6.62


Regional F&B

Sadafco 27.83 15.43 4.14 3.69

Al Marai Co. 24.36 24.36 3.89 3.89

Agthia Group 19.87 19.87 2.98 2.98

Halwani Bros. 17.47 17.47 3.06 3.06

Savola 14.95 14.95 2.54 2.54

Sample Median - Regional F&B 19.87 17.47 3.06 3.06


Global F&B

Bega Cheese Ltd. 53.46 29.95 2.11 2.63

Bright Dairy & Food Co Ltd. 46.82 46.82 4.30 4.30

Danone SA 29.66 29.66 3.04 3.04

BD Rangpur Dairy & Food Products Ltd 28.55 28.55 1.29 1.29

Saputo Inc. 23.96 26.50 3.83 4.08

Namyang Dairy Products Co Ltd. 23.44 23.44 0.59 0.59

Vietnam Dairy Products Joint Stock Company 21.93 21.93 7.42 7.42

Maeil Dairy Industry 20.76 20.76 1.52 1.52

Dairy Crest Group PLC 20.58 22.17 2.10 6.48

China Huishan Dairy Holdings Co Ltd. 18.40 48.59 1.15 2.62

China Mengniu Dairy Co Ltd. 17.37 17.37 1.88 1.88

Sample Median - Global F&B 23.44 26.50 2.10 2.63

Arabian Food Industries - DOMTY 12.73 19.96 10.35 6.64

Value(EGP / Share) Potential

100% DCF 6.75 16%

100% P/E Multiple 7.68 32%

50% DCF / 50% P/E Multiples

7.22 24%

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OCTOBER, 2016

Upside Risks:

- Ability to grow the market share in the cheese industry, beyond our expectations. - Continuation of the successful deals with Russian companies. - Successful penetration in East and Sub-Saharan African countries, enabling it to secure more FX. - Successful penetration in the new segments; cheese sandwich and hard cheese, beyond our expectations. - Successful penetration in the other new segments; custard, flavored milk and whipping cream.

Downside Risks:

- Further devaluation of the EGP than our expectation. - Continuation of the FX crunch. - Increase in prices of raw materials. - Loss of strong relation with Tetra Pak. - Losing market share in any of the segments, due to the severe competition from local and international competitors. - Inflationary pressures weakening the consumers’ purchasing power. - Failure of the new product segments; cheese sandwiches and hard cheese. - Failure to penetrate in East and Sub-Saharan African countries.

Financial Statements … Historical & Forecast

Income Statement Brief Hist. Forecast In EGP Mn 2015 2016F 2017F 2018F

Revenues 1,400 1,743 2,190 2,528

Change 24% 24% 26% 15%

COGS 1,016 1,313 1,784 2,033

Change 16% 29% 36% 14%

Gross Profit 384 430 406 496

Depreciation & Amortization 23 23 36 39

EBITDA 230 224 175 233

Net Income (Before Minority Interest) 129 82 58 104

Net Income (After Minority Interest) 129 82 58 104

Net Attributable Income 129 78 55 99

NPM 9% 5% 3% 4%

Balance Sheet Brief Hist. Forecast

In EGP Mn 2015 2016F 2017F 2018F

Cash 28 66 44 66

Net Receivables 243 222 269 291

Net Inventory 165 211 275 303

Other Current Assets 90 105 120 125

Total Current Assets 526 604 708 785

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OCTOBER, 2016

SOURCE: DOMTY & PRIME ESTIMATES

Net PPE 189 328 326 393

Other LT-Assets 20 15 10 5

Total Long Term Assets 209 343 336 398

Total Assets 735 948 1,044 1,183

Liabilities

STD - incl CPLTD 328 464 459 478

Accounts Payable 79 102 138 158

Total Current Liabilities

502 641 701 754

Total Long Term Liabilities 75 59 42 39

Total Liabilities 577 701 743 793

Equity

Paid-in-Capital 50 56.5 56.5 56.5

Reserves 14.6 30.3 40.3 47

RE 98 165 208 291

Total Equity 158 247 301 390

Financial Ratios Hist. Forecast

GPM

27%

24.7%

18.5%

19.6%

EBITDA 16% 13% 8% 9%

NPM 9% 5% 3% 4%

EPS 0.46 0.29 0.21 0.37

DPS - - 0.04 0.11

P/E 12.73 19.96 28.19 15.76

EV/EBITDA 8.7 9.3 12.0 9.0

ROA 17.89% 9.27% 5.55% 8.87%

ROE 66.56% 33.99% 18.57% 26.77%

Debt / Equity Ratio

Total Assets Turnover

24.45% 29.52% 28.22% 29.23%

1.95 2.07 2.20 2.27

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OCTOBER, 2016

CPI INDEX IN 2015 & 2016 – INDEX AND F&B INDEX

SOURCE: CBE

The Egyptian F&B Sector:

The Egyptian F&B sector has shown strength and resilience since 2011. The sector was able to withstand the effects of political and economic instability that occurred during the 2011 and 2013 revolutions. The sector achieved growth rates that were much higher than that of the overall economy. The strength of the sector is supported by several factors, including, the favorable demographics, the rising consumption from a very low base and the Egyptians’ high expenditure on food items. Moreover, the Egyptians’ preference for affordable options and the changing lifestyles and consumption patterns have changed some of the market dynamics. During the last several years, the “on-the-go” consumption pattern has expanded tremendously, primarily due to the urban lifestyle becoming increasingly busier, as a result of family members spending more time out of the home, increasing female participation in the workforce, growing number of students and longer commute times.

On the other hand, during 2016, the sector faced many challenges, most of which were due to macro-economic conditions. The challenges included:

- High inflation rates:

Egypt has suffered during the last several years from high inflation. The average CPI was a double-digit figure during 2014, 2015 and so far for 2016. F&B is the largest item on the CPI, where it represents c40% of the total index. The government has tried to curb such high inflation, through raising the corridor rates by 250bps throughout 2016, yet all these trials have deemed unsuccessful. At the first MPC meeting in 2016, held on January 28th, the committee decided to keep the overnight deposit rate, overnight lending rate, and the rate of the CBE's main operation unchanged at 9.25%, 10.25%, and 9.75%, respectively. Meanwhile, at the last MPC meeting, held on September 16th, the committee decided to keep the overnight deposit rate, overnight lending rate, and the rate of the CBE’s main operation unchanged at 11.75%, 12.75%, and 12.25%, respectively.

During June, July and August 2016, the inflation rates were the highest in 8 years, where the CPI rates were 14%, 14% and 15.4% respectively. The rise in the F&B index was even higher than that of the general index as the F&B basket inflation rates were 17.6%, 18.4% and 19.3%. The rise in the F&B inflation rates can be attributed to many reasons; the EGP devaluation that took place in March, the FX shortage where most F&B producers started to resort to the parallel market for FX, the 40-45% spread between the official and the parallel EGP/USD exchange rates, the holy month of Ramadan coinciding in June, supply shortage in some items and usually the prices of some items, as fruits and vegetables witness price hikes due to the weather conditions. During the coming months, inflation is unfortunately expected to keep rising, mainly due to the application of the VAT tax, the expected EGP floatation / devaluation and the austerity measurements / economic reforms that the government is expected to undertake as soon as the IMF funding arrives. Such inflation rates would affect the Egyptians’ purchasing power, and even if Egyptians place a very high priority on food items, they would eventually end up minimizing the purchases of what can be perceived as “non-essential / luxurious food items”.

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CPI Index F & B Index

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OCTOBER, 2016

ANNUAL CHANGE - CPI INDEX IN 2015 & 2016 – INDEX AND F&B INDEX

SOURCE: CBE

- Application of the VAT tax:

Egypt's government has announced on several occasions since 2007 that it is going to implement the VAT in order to increase the fiscal revenues, but the decision has been repeatedly postponed. During 2016, the government has made it very clear that the application of the VAT is inevitable and it is on top of the measurements the government will undertake, under what is referred to as the “Economic Reform Program”. Moreover, international institutions, such as the IMF and the World Bank, started to make the enactment of the VAT tax, in addition to other measures, a condition for receiving loans and grants; the IMF made the application of the VAT one of the conditions for Egypt to receive the USD 12bn, three-year funded facility. By the end of August, 2016, The House of Representatives approved a baseline rate for the VAT. The VAT will be set at 13% in year 1 and then rise to 14% in year two. At the 13% rate, the government is expected to receive EGP 20bn in FY2016/17. The government was hoping to collect EGP 32bn in FY2016/2017, yet the 1% cut from the 14% baseline would reduce EGP 8bn, in addition to the fact that the measure will be in effect for only 10 months of the current fiscal year would further reduce it by EGP 4bn. On Wednesday, 7th of September, 2016, the Egyptian president, Abdel Fattah El Sissi ratified the VAT law. The law provides a list of 57 goods that are to be exempted from the VAT tax, which makes it one of the largest VAT exemptions lists in the world. Many of these exempted goods belong to the F&B sector and it shows the government’s commitment to shielding the poor. Even though that many government officials claim that the application of the VAT tax will not raise the general prices, we believe that prices would keep rising in the coming months due to the application of the VAT tax.

List of Exempted F&B Items from the VAT Tax

- Infant formula milk and dairy products (including milk).

- Baby food products.

- Eggs (excluding pasteurized eggs).

- Sugar.

- Tea and Coffee.

- Products produced at mills, except for premium flour.

- Bread.

- Pasta.

- Animals and birds (alive, slaughtered and frozen).

- Processed and frozen meat.

- Fish and seafood (fresh and frozen).

- Agricultural products including seeds and excluding tobacco.

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Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16

CPI Index - Change y-o-y F&B Index - Change y-o-y

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OCTOBER, 2016

SOURCE: THE OFFICIAL GAZETTE, ISSUE NO. 35, ISSUED 7/9/2016

SOURCE: AL MAL NEWS

- Honey, molasses, halawa and tehina.

- Locally produced fruits and vegetables, excluding potatoes, juice and fruit concentrates.

- Legumes, grains, table salt, spices and flavors.

- Increases in the electricity prices:

In August, 2016, the government announced a new tariff list for electricity. The government justified the increase in the prices of electricity by its cost of production; the cost of producing 1 kWh has increased to EGP 0.63 from EGP 0.47 during the year. The old prices would have increased the cost of subsidizing electricity to EGP 40bn if the consumer prices were not increased, where only EGP 30bn were allocated for power subsidies in the FY2016/17 state budget. The announcement was made during August, yet the new prices were applied retrospectively starting July.

The F&B sector is not considered an energy-intensive sector and most of the F&B companies would lie in the first two trenches in the commercial consumption tiers where electricity prices only rose by an average of 11%. Even though the utilities’ costs represent 5-10% of most of the F&B companies’ COGS, most of the companies would try to pass the increase onto the consumers. On the other hand, the electricity prices for all the residential consumption tiers rose by an average of 37%, which will affect the purchasing power of the consumers.

The New Prices per kWh Across the Residential Consumption Tiers

Tier New Price - (EGP/kWh) Old Price - (EGP/kWh) % Change

0- 50 kWh 0.11 0.075 47%

51-100 kWh 0.19 0.145 31%

0-200 kWh 0.215 0.16 34%

201-350 kWh 0.42 0.29 45%

351-650 kWh 0.55 0.39 41%

651-1,000 kWh 0.95 0.68 40%

Above 1,000 kWh 0.95 0.78 22%

The New Prices per kWh Across the Commercial Consumption Tiers

Tier New Price - (EGP/kWh) Old Price - (EGP/kWh) % Change

0-100 kWh 0.35 0.34 3%

101-600 kWh 0.69 0.58 19%

Above 600 kWh 0.96 0.86 12%

- FX shortage and rising rates in the parallel market:

Since 2015, the Egyptian economy has faced many challenges, where the FX shortage and the energy shortage were among these challenges. During 2015 and till 1Q2016, the F&B sector was not harmed severely by the FX shortage, as the CBE prioritized the F&B sector, in addition to some other sectors such as the pharmaceuticals sector. However, some major producers had reported that the lead time lengthened as the banks provided them with the required FX after 4-6 weeks.

During that time, food producers were able to source the required FX entirely from the banking sector at the official rates. Since the beginning of the 2Q2016, most of the food producers started resorting to the parallel market, were some had to secure from 50-90% of their required FX from the parallel market.

As for the exchange rates, the CBE adopted more of a contractionary monetary policy since 2015 as it was viewed that an EGP devaluation was inevitable for economic development and attracting investments. The EGP was devaluated by 9% and 14% in 2015 and 2016 (till date) respectively. Another round of EGP devaluation / floatation is expected to occur during October 2016. On the other hand, the exchange rates in the parallel market skyrocketed during 2015 and even further in 2016. The EGP lost its value by c10% and 66% in 2015 and 2016 (till date) respectively.

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OCTOBER, 2016

EGP / USD OFFICIAL RATE - 2015 & 2016 EGP / USD PARALLEL MARKET RATE - 2015 & 2016

SOURCE: BLOOMBERG, REUTERS, AL MAL, ENTERPRISE

EGYPTIAN CHEESE INDUSTRY

CHEESE CONSUMPTION / CAPITA (KG, 2014)

SOURCE: DOMTY

All F&B producers were affected negatively by either the EGP devaluation or resorting to the parallel market. Most F&B producers have a negative exposure to FCY as most of the raw materials are imported and their exports represent less than 10% of their sales.

We expect that during the short-term, the sector would be harmed to a large extent, however in the long-term the sector would be able to maintain the strong growth, driven by the favorable conditions discussed earlier.

The Egyptian Cheese Industry:

Hard Unprocessed Cheese, 46%

Soft Unprocessed Cheese, 38%

Processed Cheese, 16%

Cheese is a staple of the Egyptian diet. It is considered the largest segment and constitutes over 40% of the total dairy market. The Egyptian cheese market is divided into two major categories; Unprocessed Cheese (slightly more than 80% the total cheese market) and Processed Cheese (c16% of the total cheese market). Unprocessed cheese can be further subcategorized into Hard Unprocessed Cheese (c46% of the total cheese market) and Soft Unprocessed Cheese (c38% of the total cheese market).

Egypt’s per capita consumption rate of cheese is higher than that of the global average and that of the regional peers, yet it remains significantly below that of the more developed markets, such as North America and Western Europe. Consequently, we believe that there is a significant room for growth, due to the evolving consumption patterns. The Egyptian cheese industry has witnessed steady growth – more than 10% per annum – since 2010, increasing to more than EGP 10bn in 2014. This growth can be attributed to the changing consumption patterns, as the cheese sector in recent years has witnessed some structural shifts fueling an increase in packaged cheese consumption due to several factors. These factors include:

- Favorable Consumption Patterns: The urban lifestyle has become busier in the last decade, as a result of family members spending more time out of the home, growing number of students, increasing female participation in the workforce and longer commute times. All these factors place a huge importance on “On-the-go consumption”. Cheese has been marked as an “on-the-go snack” due to its innovative and small packaging, making it more suitable for rapid consumption.

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OCTOBER, 2016

UNPROCESSED CARTON PACK CHEESE – MARKET SHARES (9M 2015)

- Innovative Product Offering: The Egyptian cheese market offers a wide variety of SKUs with different tastes, size and price ranges in order to seem appealing to the mass consumers. There is an increasing trend toward offering smaller and more affordable SKUs and focusing more on consumers in the lower income segment and rural areas.

- Consumer Shift from Loose to Packaged Cheese: the majority of Egypt’s cheese production has historically been locally produced non-packaged cheese “Loose Cheese”. Loose cheese has been associated with various health and hygiene issues, mainly due to the unregulated production and distribution process. Governmental campaigns, increased consumer awareness and rising urbanization has driven a shift from loose cheese to packaged cheese products. The shift has also been driven by the convergence of the price differentials between loose and packaged cheese. The shift has occurred quiet fast, as the loose cheese market share declined from 72% in 2007 to only 20% of the overall unprocessed soft (white) cheese in 2014.

- Adoption of Western Eating Habits: during the last years, Egyptian consumers have adopted westernized eating habits. The number of Western-style food restaurants has grown during the last decade. Cheese is a key ingredient in most of the Western-style meals, such as pizza, burgers and pasta.

The cheese market in Egypt is dominated by traditional groceries that cater to on-the-go consumption patterns; as approximately two-thirds of Egyptian cheese sales are estimated to have occurred through traditional retailers in 2014. However, some cheeses such as mozzarella, spreadable cheese and plastic-pack cheeses require special storage where only modern trade channels, including modern grocery retailers can properly store and sell such products. The market for these products has significant growth potential as modern trade channels increase their penetration in the Egyptian market.

Unprocessed Cheese:

Unprocessed cheese - the natural cheese - is the most prevalent type of cheese in the local Egyptian market, where it represents more than 80% of the total cheese market. Unprocessed cheese - soft and hard – is prepared using natural ingredients, such as raw milk and thus it is perceived to have more of a nutritional value. Unprocessed cheese is also considered affordable to the mass consumers and is currently offered in many sizes, flavors and tastes.

Unprocessed Soft Cheese:

Unprocessed soft cheese is packaged in either plastic packaging “plastic tubs” or “carton packs”. “Plastic pack” cheese is typically sold fresh and hence it requires special handling and storage techniques with respect to refrigeration. Consequently, plastic pack cheese is usually consumed in homes or restaurants with sufficient refrigeration capacity. On the other hand, carton pack cheese has a relatively long shelf-life (some have shelf-life up to one year) and typically does not require refrigeration and thus consumers with busy lifestyles tend to perceive the carton pack cheese as an ideal option.

The unprocessed soft cheese market has almost doubled in recent years, reaching more than EGP 4bn at 2014. The growth has largely been driven by the strong demand for carton pack cheese sales, due to the carton pack cheese’s attractiveness as a convenient on-the-go food and its ability to be sold through more diverse sales channels than plastic pack cheese.

Domty, 43%

Obour Land, 31%

Americana - Green

Land, 10%

Panda, 8%

Others, 8%

The competitive landscape of the unprocessed soft cheese industry has changed to a large extent in the last decade, where the producers who foresaw the potential shift of consumers’ preferences were able to grasp the fruits of the growing market. Domty was one of the companies who foresaw the potential shift towards the conveniently consumed and carried cheese products, where it began to offer carton pack cheese products in 2007. Domty and other competitors who were able to capitalize on the increasing demand for the carton pack cheese through increasing their production capacity of carton pack cheese were able to advance and increase their market share at the expense of earlier market leading brands. As of September 30th, 2015, Domty had the largest market share of the unprocessed carton pack cheese with a share of 43%, followed by Obour Land with a market share of 31%.

11


OCTOBER, 2016

UNPROCESSED PLASTIC PACK CHEESE – MARKET SHARES (9M 2015)

SOURCE: DOMTY

PROCESSED CHEESE – MARKET SHARES (9M 2015)

SOURCE: DOMTY

Unprocessed Hard Cheese:

The unprocessed hard cheese is considered the largest segment of the Egyptian cheese market, where it represents almost half of the total Egyptian cheese market. The unprocessed cheese market in Egypt reached EGP 5bn in 2014, showing an almost 10% annual growth rate. Unbranded roomy cheese is the most common type of the Egyptian hard cheese and it is produced locally. It represents almost 80% of the Egyptian hard cheese, where the remaining share is for the more expensive imported hard cheese brands, where their prices are far beyond the price range of the mass consumers.

Processed Cheese:

President, 52%

Domty, 23%

Green Land, 9%

Panda, 2%

Others, 14%

President , 67.5%

Domty , 15%

Panda , 9.6%

Cheesa, 2.2%

Others , 6%

On the other hand, the plastic pack cheese has more restrictive requirements and thus has grown less rapidly than carton pack cheese. As of September 30th, 2015 President had the largest market share for the unprocessed plastic pack cheese with a share of 52%, followed by Domty with a share of 23%.

Processed cheese represents less than 20% of the total Egyptian

cheese market. It is more of a niche product, as it is targeted at

consumers with westernized eating habits, as they are characterized

as less fatty and less salty. Processed cheese contains more artificial

ingredients with 51% natural cheese, emulsified and held together

with preservatives with some additions of artificial ingredients and

salt. The main two categories of processed cheese are the

mozzarella and the spreadable cheese. The prices of processed

cheese are relatively higher than the unprocessed cheese.

Processed cheese is used intensively in the hotel and restaurant

industries. The deterioration of the tourism industry since 2011 has

impacted the processed cheese market to some extent. The growth

of the processed cheese has been restricted in the past by the

limited number of modern sales channels equipped with cold

storage capabilities. The processed cheese market is estimated to

have reached EGP 1.7bn in 2014. As of September 30th, 2015 the

largest processed cheese producer was President with a market

share of 67.5%, followed by Domty with a share of 15%.

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OCTOBER, 2016

JUICE CONSUMPTION / CAPITA (KG, 2014) JUICE – MARKET SHARES (9M 2015)

SOURCE: DOMTY

The Egyptian Juice Industry:

Juice is a differentiated product, where it could be divided according to the taste, quality or the fruit concentration level.

There are 3 main juice categories with regards to the concentration level:

- 100% Juice / Pure Juice: This product contains 100% fruit content and it is considered a niche product as it focuses on quality. It is primarily targeted towards consumers in higher income segments and thus they are priced higher than juices with lower fruit content.

- Nectar Juice: This product contains at least 25% juice content. It is the most prevalent juice product in Egypt as it is considered relatively cheap in comparison to pure juice.

- Drink Juice: This product has juice content ranging between 10-25%. The drink juice is the cheapest alternative and it primarily targets consumers seeking flavor rather than the level of fruit content.

The juice market in Egypt is still quiet underpenetrated, as the consumption per capita is far below the global average. In 2014 the average consumption per capita in Egypt stood at 4.6kg/annum, versus a global average of 9.9kg/annum. The juice market has grown in the past years, reaching EGP 3bn in 2014, exhibiting a growth rate of more than 8% per annum since 2010. The consumer shift from carbonated soft drinks to juice has been one of the most important growth drivers for the juice industry, where an increasing level of health awareness is driving a structural shift from carbonated soft drinks towards fruit juice, which is perceived as a healthier alternative. Nectar is the largest and fastest growing segment of the juice market, as it represents more than two-thirds of the total juice market in 2014, followed by drink (less than half of the nectar’s market share) and 100% pure juice (less than 5%). The juice industry in Egypt is very dynamic. One of the biggest threats in the industry is the ease of entrance and the very low barriers to entry. The market is also very fragmented as it is estimated that there are more than 300 juice producers in Egypt. As for the SKU sizes, sizes ranging 200-250ml were the most demanded SKUs in 2014.

In our re-initiation of coverage report on “Juhayna Food Industries – JUFO” published in February 2016, we mentioned that 2015 had witnessed many M&A transactions. Most of them were in the dairy and juice sectors. 2016 followed suit, where the F&B market witnessed many huge transactions, where the cheese and juice industries were dominant. The transactions included mergers, acquisitions, capital increases and listings on the EGX. This implies the huge interest of investors- international and local- in the dairy and juice sectors, where the competitive landscape will change to a large extent in the coming years.

Dairy & Juice Transactions in 2015

2015 Feb-15

Qalaa announced that it is willing to sell Dina Farms and it put it on the auction block for an estimated value of EGP 700mn. Abraaj, Savola, Al Marai have shown interest.

Mar-15 Pioneers acquired Arab Dairy for EGP 257 mn. The company is best known for its “Panda Cheese”.

36.2

25.5

19.1 15.3

5.6 4.9 4.6

9.9

0

5

10

15

20

25

30

35

40

North America

Western Europe

Eastern Europe

Latin America

Asia Pacific

Middle East & Africa

Egypt World

Faragalla, 21%

Beyti , 20%

Juhayna , 19%

Rani, 12%

Domty, 7%

Best, 4%

Pepsico, 3%

Sakr, 3%

Coca Cola, 1% Others, 10%

13


OCTOBER, 2016

SOURCE: PRIME RESEARCH

May-15 Juhayna Food Industries annoucned it will form a VC with Denmark's Arla Foods that will be 51% owned by Juhayna and managed by Arla. The VC, ArJu Food Industries, will add cheese, butter and infant formula to Juhayna's existing product lines.

Jun-15 Arabian Food Industry Co. Domty - announced that it is planning to list 40% of its shares on the EGX in 1Q 2016.

Dec-15

Kamal Hagag acquired Misr October for Food Industries (El Misrieen) for EGP 50mn. El Misrieen was owned by Qalaa Agrifoods Business Unit Gozour

Qalaa announced that it is willing to sell Enjoy.

Danone acquired Halayeb Company for Dairy Products for EGP 120mn. The company owns the Kateelo Milk Brand.

Beyti announced its plans to invest EGP 4bn to build a new juice plant and two dairy farms.

Dairy & Juice Transactions in 2016

2016

Mar-16

Domty's IPO: Domty’s public offering closed on 17-3-2016. The company had offered 122.5mn shares. The offering as a whole was 6x oversubscribed. 12.25mn shares were allocated to Egyptian retail investors and 110.25mn shares were allocated for international institutional investors. Shares were priced at EGP 9.20 per share and trading began on Tuesday, 22 March, 2016.

Apr-16 Qalaa's subsidiary Gozour signed a sale and purchase agreement to divest its entire holding in milk and juice producer Enjoy and El-Aguizy International for Economic Development. The purchaser of both companies is Kamal Haggag, the same investor who also bought the Gozour subsidiary El-Misrieen in December 2015.

Jun-16

Obour Land announced it will submit its final documentation to the EGX for an IPO.

Juhayna announced its plans to invest EGP 640mn in growth in 2016. Of that amount, EGP 250 mn will be directed toward manufacturing expansions for the company’s juice and dairy lines and EGP 390mn will be earmarked to expand its animal resources and transportation fleet.

Aug-16

Juhayna lowered its CAPEX guidance for 2016, targeting now EGP500mn, down from EGP640mn previously. The FX shortage was the main reason behind the CAPEX plan’s reduction.

EFSA has given the approval for Domty to issue GDRs.

Sep-16

Obour Land filed with the EGX for a listing in advance of an IPO. The company is expecting to list in October, with the planned offering expected to take place in January 2017 at the latest. Proceeds for the funds to include the launch of frozen meats and ice cream product lines and the expansion of its juice and dairy production lines. The company is hoping to raise EGP 100 mn from the IPO.

Domty has begun trial runs of its new juice factory in Sixth of October City.

The EGX approved the conversion of Domty’s stocks to GDRs. Trading in Domty’s global depository receipts began on September 21st2016. Domty shareholders can converts up to 21.67% of the company’s current outstanding share capital to GDRs.

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OCTOBER, 2016

SOURCE: DOMTY & PRIME RESEARCH

OWNERSHIP STRUCTURE POST IPO & CLOSED SUBSCRIPTION OWNERSHIP STRUCTURE PRE IPO

Arabian Food Industries – Domty:

Arabian Food Industries – Domty – is a leading food and beverage company in Egypt and the leading cheese producer, selling a variety of packaged, processed and unprocessed cheese, as well as a range of juice products. The company began operations in 1990 and pioneered the production of packaged white cheese in Egypt. Ever since, Domty has become a household name and it currently holds the #1 market position in the Egyptian cheese market. Since 2012, Domty has been recognized as the world’s largest producer of Tetra Pak packaged white cheese. In 2013, the company decided to penetrate the juice industry and it has been quiet successful. The company succeeded to further penetrate the mass market through its fighter brands – Gebnety and Damo cheese products and in some of its export markets the Bravo drink juice – where all these fighter brands have lower starting price points and would be more affordable to the mass consumers. The company intends to expand into other market segments in the coming few years, such as cheese sandwich, hard cheese, flavored milk, whipping cream and custard. The company currently exports its products to more than 35 countries.

Listing on the EGX, IPO and Stock Performance:

In March, 2016, Domty held its IPO on the EGX. The company offered 122.5mn shares, representing 49% of the total shares. The offering was divided between an international institutional offering and an Egyptian retail offering. 110.25mn shares were allocated for the institutional offering, representing 90% of the total offering and the rest of the shares - 12.25mn shares - were allocated for the retail offering, representing the remaining 10%. The offering was priced at EGP 9.2/share, which was the top of the indicative range (EGP 8.8 – EGP 9.2 / share). The IPO raised EGP 1.13bn.

The selling shareholders were the Damaty family (65%) and Yehia Bin Laden (35%). After the IPO was concluded, all the proceeds were received by the selling shareholders. The selling shareholders agreed to use a portion of the gross proceeds of the offering to exercise a “Closed Subscription”, in order to fuel growth and expansion plans. In April, 2016, the company raised its issued capital by 32.6mn shares worth EGP 300mn through Trevi Holding (where the Damaty family and Yehia Bin Laden are the beneficial owners) at a price of EGP 9.2/share.

No. of Shares (Mn.) %

Institutional Offering 110.25 90%

Retail Offering 12.25 10%

Total Offering 122.5 100%

Coverage

Institutional 5.5X

Retail 10.7X

Total Offering 6x

Timeline

3 - 14 March 2016 Book Building.

6 - 17 March 2016 Retail Subscription Period.

6 -14 March 2016 Institutional Subscription Period.

14 March 2016 Expected Pricing - Was set at EGP 9.2.

22 March 2016 Commencement of Trading on the EGX.

7 April 2016 The Closed Subscription.

21 August 2016 EFSA approval the issuance of GDRs.

15 September2016 EGX approval of GDRs conversions.

21 September 2016 Commencement of GDRs Trading.

Yehia Bin Laden , 34.7%

El Damaty Family ,

65.3%

Yehia Bin Laden , 16%

El Damaty Family , 29%

Trevi Holding ,

12%

Free Float , 43%

15


OCTOBER, 2016

SOURCE: BLOOMBERG

The closed subscription amounted approximately EGP 300mn, where according to management will be used as follows:

1. The expansion and upgrade of the sales and distribution network: Additional distribution centers and sales staff where the direct coverage is currently limited will be added. (EGP 173mn)

2. The installation of a production line of spreadable cheese products in glass jars (EGP 16mn). 3. The geographic expansion into new markets in selected underpenetrated destinations with dynamics close to that of Egypt,

mainly in East and sub-Saharan African countries. (EGP 70mn). 4. The establishment of a cash reserve to fund future expansions. (EGP 41mn).

Later on, the company decided to further penetrate the international markets, through the issuance of GDRs. The trading on the GDRs started on September 21st, 2016. According to the latest GDR regulations, Domty’s shareholders can convert up to 21.67% of the company’s current outstanding share capital to GDRs (based on Domty’s current free float of c. 43%). This implies a conversion of 10mn shares (3.5% of the share capital), where 1 GDR will represent 5 local shares.

Even though the IPO’s timing was very good; the stock’s performance

has been relatively poor since its inception. The stock’s trading

commenced one week after the EGP devaluation, which was

reflected positively on the EGX. Since its inception, the stock lost 37%

of its opening price (EGP 9.20/share), where the EGX gained 13%

since the stock’s inception. Stocks included in the F&B sector on the

EGX had a very poor performance throughout the year as well,

primarily due to the sector’s negative exposure to FX. Both, Juhayna

Food Industries (JUFO.CA) and Edita Food Industries (EFID.CA) lost

42% and 41% of their values respectively since the beginning of 2016,

where Domty has followed suit and lost 37% of its value since its

inception and reaching its all-time low price of EGP 5.80/share on

September 5th, 2016.

0

2

4

6

8

10

12

14

DOMT EGX 30 - Rebased

16


OCTOBER, 2016

Timeline:

Timeline

Development Phase

1984 The company was founded by Omar El Damaty as Al Damaty for Food Industries LLC.

1989 The company's legal form was changed from a Limited Liability Company to a Joint Stock Company, under the name of "Arabian Food Industries SAE".

1990 Commercial operations began, with the introduction of the first packaged white cheese product in the Egyptian market

1991 Beginning of mozzarella cheese production, where Domty was the first company to do so commercially.

1994 The company was named an approved supplier of Pepsi Co. Middle East and Pizza Hut. The company started producing spreadable cheese products. Introduction of "Ultra Filteration" technology.

1999 The company started to export its products to customers in the MENA region.

Turnaround Phase

2006 The company's name was changed to "Domty for Food Industries SAE", then it was changed in the same year to its current name "Arabian Food Industries Company - Domty SAE"

2007

The carton pack cheese products were introduced. Tetra Pak was appointed as a key supplier for processing and filling the machines for the carton pack cheese products. The company went through a re-branding campaign, where it changed its packaging and logo.

2008 The company introduced its first flavored carton pack cheese product.

2010 The company became Egypt's packaged white cheese market leader.

Growth 1 Phase

2012

The company was recognized as the world's largest Tetra Pak packaged white cheese producer. The company launched two fighter brands - Damo and Gebnety -, aimed at lower income consumers.

2013 The company penetrated the Juice industry by first offering a premium quality nectar juice.

Growth 2 Phase

2014

The company's annual sales exceeded EGP 1bn for the first time. The company launched its 100% juice product under the Domty Slim brand. The company began co-packing for Coca-Cola / Aujan's Rani juice products. The company acquired its sister company "Tatweer for Food Manufacturing - Tatweer" which owns and manages the company's warehouse.

2015

The company started optimizing its operational efficiency by installing the Oracle Enterprise Resource Planning "ERP" system. The company introduced a new product for the export markets in the "drink" juice category, under the Bravo brand.

2016 The company was listed on the EGX - DOMT.CA in March 2016. The company acquired the regulatory approvals to issue GDRs on the London Stock Exchange and trading started on the GDRs on Sep. 21st 2016

17


OCTOBER, 2016

REVENUES– EGP MN.

SEGMENT ANALYSIS

SOURCE: DOMTY

SOURCE: DOMTY

Business Overview:

Business Segments & Products Portfolio:

Cheese Segment:

Domty produces cheese in two main product sub-segments; packaged white cheese and processed cheese, each of which contains two different categories. The packaged white cheese is divided into carton pack cheese and plastic tub cheese and the processed cheese is divided into the mozzarella cheese and the spreadable cheese.

Until the introduction of the juice segment in October 2013, the cheese segment was the company only business segment and till date it remains the company’s core business. The cheese segment represented 84% and 86% of the total sales value in 2015 and 2014.

Product Segment Cheese Juice

Product Sub-Segment White Cheese Processed Cheese

Product Category Carton Pack Plastic Tub Mozzarella Spreadable Nectar Juice Drink

Year Launched 2007 1990 1991 1994 2013 2014 2015

Brands Domty - Gebnety -

Damo Domty - Damo

Domty - Gebnety Domty Domty - Bravo - Slim

Market Share (Sep. 2015) 42.60% 23.20% 45.40% 4% 7.10%

Market Rank (Sep. 2015) #1 #2 #1 #2 #5 Contribution to Revenue (2015 / 2014) 66 / 64% 11 / 14% 6 / 7% 1 / 1% 16 / 14%

Domty has experienced high sales growth over the past 25 years. From 1999 to 2006, sales grew at a CAGR of 12.4% Growth figures hiked since 2007 when the company introduced the carton pack cheese. From 2007 till 2014, sales increased at a CAGR of 29.2%. In 2015, the company was able to maintain its outstanding growth, as it achieved sales of EGP 1,400mn, showing a growth of 24%. Domty’s success in spotting the shifts in the consumption patterns has enabled the company to increase its market share in the packaged white cheese from the 4th position with a market share of 7.9% in 2007 to the 1st position with a market share of 41.1% by the end of September 2015. Initially, the growth was driven by the introduction of carton pack cheese products, but the sales growth in later years is mainly attributed to other management initiatives The outstanding growth that the company was able to achieve in the past years could be attributed to the company’s ability to capitalize on the changing consumption trends and the introduction of innovative new products. The company added to its products’ portfolio smaller SKUs, such as the 80g SKU that was introduced in 2012 and the 70g SKU that was introduced in 2015. Also in 2015, the company launched a 1kg carton pack cheese SKU and a new high cream Feta Plus carton pack cheese SKU. In addition to the cheese segment, the company penetrated the juice industry in 2013. The juice portfolio focused initially on the mid-tier nectar products, however in 2014 the company introduced high quality 100% juice products under the Domty “Slim” brand and in 2015 the company launched a lower tier drink product for the use in the export business under the “Bravo” brand.

74 84 97 95 110 129 140 160 188

310 348 402 445

660

842

1129

1400

0

200

400

600

800

1000

1200

1400

1600

2007 - 2014 CAGR29%

2015 CAGR 24%

1999 – 2006

CAGR 12%

18


OCTOBER, 2016

DOMTY CHEESE SEGMENT

SOURCE: DOMTY

SOURCE: DOMTY

- Carton Pack Cheese:

- Plastic Tub Cheese:

The plastic tub cheese is Domty’s flagship product category, launched in 1990 as one of the first branded packaged white cheese products in the Egyptian market. With a range of 40 SKUs and nine flavors, all offered under the Domty brand, the plastic tub cheese category contributed 10.5%% and 13.5% to the company’s total sales in 2015 and 2014 respectively, and 12.6%% and 15.8% to cheese sales in 2015 and 2014 respectively. Domty is the second largest producer of plastic tub cheese in Egypt with a market share of 23% as of September 30th, 2015, behind only Best Cheese Company (President & Teama). In the plastic tub cheese category, the company focuses on its specialty low salt product, although it also offers a range of other flavors, including feta, istanbolly, double cream and baramili. Plastic tub cheese product quality is very sensitive to storage conditions, and constant refrigeration is required (unlike carton pack cheese). Consequently, sales channels are limited to relatively modern trade channels that have refrigeration capacity, and the product offerings in this category are also larger in size, with relatively big/multi-serve SKU sizes ranging from 400 g to 12 kg. These factors have an impact on the target consumer base, as the primary consumers for the larger, more expensive plastic tub cheese (compared to carton pack cheese) are individuals in the upper and middle income range with adequate refrigeration capacity at home, as well as restaurants and other food industry businesses.

Domty Cheese Segment

Packaged White Cheese Processed Cheese

Carton Pack Plastic Tub Mozzarella Spreadable

Driven by the success of the carton pack cheese product category, the cheese segment sales’ have grown at a CAGR of 26.4% between 2007 (the year the category was launched) and 2014 and it maintained the high growth level in 2015, where it grew by 21% y-o-y.

Since 2007, the carton pack cheese has become the company’s main product category, contributing 65.7% and 64.4% in 2015 and 2014 respectively to total sales value and contributing 78.6% and 75.2% in 2015 and 2014 respectively to total cheese sales.

As carton pack cheese does not require refrigeration, it is ideal as an affordable, filling snack that consumers can easily carry with them. Domty is the market leader in the Egyptian carton pack cheese segment, with a market share of 43% as of September 2015 (up from 31% in 2012), compared to Obour Land with a 31% market share and Americana’s Green Land with a 10% market share.

The carton pack cheese products compromise 74 SKUs in 10 flavors, offered in different sizes from 70g up to 1kg. The larger SKUs cater mainly the consumers in the upper and middle income range and the smaller SKUs targets all the income levels, mainly the on-the-go consumers. It is also available in multiple varieties to satisfy a broad spectrum of consumer preferences; feta, istanbolly, olive, light, baramili, double cream and yellow cheese.

The company launched the Gebnety and Damo brands in 2012 as an affordable quality product targeting consumers in the lower income segment, with Gebnety positioned as a mid-range price product between the premium Domty brand and the Damo brand. These brands usually contribute 25-35% of the total carton pack cheese sales.

Carton Pack Cheese

Year of Launching: 2007

Market Rank: #1

No. of SKUs: 74

Brands

Domty,

Gebnety,

Damo

Market Share:

2012 31% 2013 40% 2014 40% 12 Months Ending Sep. 2015 43%

Contribution to Cheese Revenues - 2015: 78.6%


Contribution to Company Revenues - 2015: 65.7%


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OCTOBER, 2016

SOURCE: DOMTY

SOURCE: DOMTY

- Mozzarella Cheese:

Amongst all the cheeses the company produces, mozzarella cheese is the most demanding in terms of storage and distribution because it requires the use of freezers. Consequently, as the company does with the plastic tub cheese, the company directly distributes the mozzarella cheese products to ensure product quality. Domty is the market leader in the Egyptian mozzarella cheese market, with a market share of 45% as of September 30, 2015. The company’s main competitors in this market include Arab Dairy, with a market share of 36% in the same period, and Cheesa (8%).

In order to ensure product quality, Domty directly distributes its plastic tub cheese products without the use of wholesalers or agents. This allows the company to ensure adequate storage conditions in order to minimize sales returns, yet it also limits to some extent the ability to grow this product category due to the additional investments necessary to increase distribution capacity in line with production capacity. Consequently, much of the company’s recent growth has occurred in the carton pack cheese segment, which has less demanding distribution and handling requirements. Sales growth in the plastic tub cheese category has been impacted as the increasing popularity of carton packs has shifted consumption patterns. Sales growth has also been limited by the company’s direct distribution capacity and the penetration of local modern trade outlets with sufficient refrigeration capacity to properly store the plastic tub cheese.

Plastic Tub Cheese

Year of Launching: 1990

Market Rank: #2

No. of SKUs: 40

Brands: Domty, Damo

Market Share: 2012 33%

2013 39% 2014 28% 12 Months Ending Sep. 2015 23%





Domty began producing mozzarella cheese in 1991, the first to do so commercially in Egypt. A relatively small part of the company’s overall business, the mozzarella cheese category contributed 6% and 6.7% to the company’s total sales in 2015 and 2014 respectively, and 7.2% and 7.8% to cheese sales in 2015 and 2014, respectively. The mozzarella cheese category comprises 14 SKUs in three flavors, with sizes ranging from 300 g to 2 kg. The mozzarella cheese category was launched mainly to foster business-to-business and catering sales, where it primarily targeted Egypt’s tourism and quick service restaurant sectors, which were booming at the time. Back then, the catering business represented approximately two thirds of the category’s sales on average, with the remaining third pertaining to retail sales, primarily upper income consumers using mozzarella as a cooking ingredient. The downturn in the Egyptian tourism industry since 2011 depressed sales to the catering industry, but this has been relatively offset by growth in retail sales as more consumers were adopting western eating habits. This dynamic has driven a reverse in the sales mix, with retail sales representing approximately two thirds of mozzarella cheese category sales in recent years. As a result, although the mozzarella cheese sales initially declined in 2011, the company was able to grow the segment’s sales in the following years on the back of retail consumption.

Mozzarella Cheese Year of Launching: 1991

Market Rank: #1

No. of SKUs: 14

Brands: Domty,

Gebnety







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OCTOBER, 2016

SOURCE: DOMTY

SOURCE: DOMTY

- Spreadable Cheese:

Like other categories of processed cheese, spreadable cheese products require constant refrigeration and thus are mainly sold in modern trade outlets. Market growth is held back by the under-penetration of modern trade outlets across Egypt as well as by affordability considerations that limit spreadable cheese from becoming a mass product. The spreadable cheese market in Egypt is dominated by the Best Cheese Company (President and Teama), which had a market share of approximately 92% as of September 30, 2015. Domty is the second largest in this category in the same period with a market share of 4%.

In addition to the sales of branded products, Domty sells certain by-products that are created during the production process, such as excess cheese scraps and unused cream derived from the raw milk purchases. These by-products represented 0.5% and 0.4% of the cheese revenues in 2015 and 2014 respectively and 0.4% and 0.4% from the company’s sales in 2015 and 2014 respectively.

Juice Segment:

Domty entered into the juice segment in October 2013. The juice segment represented an attractive opportunity as a sector in which:

- Product quality and taste are of huge importance. - There are significant opportunities for product innovation (categories, flavors, packaging, etc.) - No single player holds more than a 25% share of the market.

Domty launched its spreadable cheese product line in 1994 in order to diversify its product offering and expand its customer base. Although the spreadable cheese is a niche product (constituting c1% of both of the total sales and cheese sales in 2014 and 2015, this category plays an important role in supporting the company’s presence across various market categories. The spreadable cheese products cater to upper income consumers, primarily schoolchildren consuming spreadable cheese sandwiches during school time. The company offers a range of 29 SKUs in eight flavors in the spreadable cheese category, offered in four sizes ranging from 140g to 400g. Unlike other competitors, which offer their spreadable cheese products in glass jars, Domty offers its spreadable cheese products in plastic jars. Consumers usually prefer glass jars, as they see value in keeping the glass jar for future use. The company allocated a part of the closed subscription proceeds in order to install a production line for spreadable cheese to be put in glass jars. The company also recently started producing spreadable cheese in plastic tubs, similar to its unprocessed cheese plastic packaging.

Spreadable Cheese Year of Launching: 1994

Market Rank: #2

No. of SKUs: 29

Brands: Domty







Juice Year of Launching: 2013

Market Rank: #5

No. of SKUs: 40

Brands: Domty, Bravo, Slim

Market Share - 12 Months Ending Sep. 2015 7%



Domty competes in two segments of the juice market in Egypt: nectar under the Domty brand and since December 2014, 100% juice under the brand name Domty Slim. In June 2015, the company also began offering in some of its export markets juice products in the “drink” category under the Bravo brand. The company’s current juice product range encompasses 40 SKUs. The company began to produce juice in late 2013 when it launched certain nectar products. In the first full year of operations in 2014, the juice segment generated 14% of the company’s total sales and it generated 16% of the company’s total sales in 2015.

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OCTOBER, 2016

Tetra Pak is one of the largest suppliers in the Egyptian juice market. Since the packaging materials for juice and carton pack cheese are similar, the company’s management saw a potential for operational and commercial synergies between the two segments. Management believes that the juice segment offers opportunities to penetrate new market segments that use similar sales channels, such as the snacks market. The management also viewed the launch of a non-dairy segment as a test of the Domty brand’s adaptability in anticipation of future product segment expansions. By the end of September 2015 Domty was able to capture approximately 7% market share of the Egyptian juice market, becoming the fifth largest by volume and overtaking established companies that had been operating in the market for a long time, including Best, Tropicana, Sakr and Coca-Cola’s Cappy. The juice market in Egypt is highly fragmented. This results in part from the low barriers for entry in the market (some brands are produced in small houses in rural areas). The main competitors in the juice market are Faragella (21.0%), Beyti (20.3%), Juhayna (18.6%) and Rani (12.1%). - Nectar Juice From the launch of the juice segment in October 2013, nectar juice sold under the ‘‘Domty’’ brand has been the company’s main juice product. As at December 31, 2014, the Egyptian nectar juice market represented more than two-thirds of the total juice market. Domty’s nectar juice range currently comprises 22 SKUs in 11 flavors, available in both portable 250ml cartons and larger 1L cartons. - 100% Juice: Domty introduced Domty Slim, the company’s line of 100% juice products, in December 2014. The 100% juice is marketed as a premium product and the range currently comprises six SKUs in three flavors in both 250ml and 1L sizes. The Egyptian 100% juice market is currently very small, estimated at less than 5% of the total juice market, but is growing at a higher rate than the overall juice market in Egypt . The 100% juice products are targeted at consumers in the upper and middle income segments who are health conscious and willing to pay for a premium product. 29FEB201618402083 - Drink Juice Domty introduced its line of drink juice products under the “fighter” brand Bravo in certain export markets (Libya and Palestine) in June 2015. The company is planning to start selling the drink juice in the local market by the end of 2016. The Bravo juice range currently comprises 12 SKUs in six flavors in both 250ml and 1L sizes.

New Products:

- Cheese Sandwich:

The company plans to introduce a new cheese sandwich product segment in 4Q2016. The production line is currently being installed and production is expected to commence by the end of 2016. The cheese sandwich is considered a natural complement to the on-the-go meal replacement SKUs. The cheese sandwich production line has an estimated cost of approximately EGP 13mn and it is expected to have a production capacity of 66mn packs per year.

- Hard Cheese:

In February 2016, Domty entered into an agreement with El Emam for Dairy Products “El Emam”, a local Egyptian producer of unprocessed roumy hard cheese, to create a VC for the production of branded packaged roumy cheese to be sold under the Domty brand. The VC will be located in Mahala in the mid-Delta region (known for the abundant raw milk supply) on land owned by El Emam, close to its existing facilities. It will be 70% owned by Domty and 30% owned by El Emam. Domty will be responsible for the construction of the production facility, production and distribution of the product. On the other hand, El Emam will be responsible for purchasing the raw milk supplies and for storing the finished product in its existing storage facilities. Production of the hard cheese is expected to begin in early 2017, at an estimated cost of EGP 25mn, with a production capacity of 3,000tpa. Even though production is expected to begin by early 2017, the product will not be available for sale before July / August 2017, as the hard cheese must be stored at least for 6 months after production to be suitable for the consumers’ preferences.

According to the company’s management, both products (cheese sandwich and hard cheese) are expected to have gross margins of 30-35%, which is relatively higher than that of the cheese products (27%) and juice products (22%). Moreover, hard cheese usually has higher starting price points than soft cheese.

The company also intends to penetrate other new segments in the coming few years. These new segments include flavored milk, whipping cream, sour cream and custard.

22


OCTOBER, 2016

LOCAL SALES CHANNELS – 10M 2015

SOURCE: DOMTY

SOURCE: DOMTY

EXPORT SALES BY COUNTRY – 10M 2015

Sales & Distribution:

The sales and distribution operations are divided into 3 segments along product lines based on the different handling requirements; fresh cheese (plastic tub cheese, mozzarella cheese and spreadable cheese), carton pack cheese and juice. Fresh cheese sales and distribution is carried out by the company due to the products’ chilled storage and distribution requirements. The carton pack cheese and juice segments sales and distribution is carried out by agents. When Domty entered the juice segment in 2013, it established a separate sales unit for the juice segment, focusing on the optimizing sales channels, which is different to a large extent than that of cheese. The juice sales unit will be a platform for future expansion ventures in the snacks industry, which are typically sold through the same channels as juice.

- Sales:

Local Sales: In Egypt, Domty relies on direct and indirect distribution channels in order to distribute its products over a vast geographical area. The direct distribution channels include retail sales, wholesale sales and catering sales, where the indirect distribution channels include sales through third party agents.

- Agents – (60-75 days on credit): In 2010, Domty expanded its sales channels to include indirect distribution channels such as agents.

Agents buy the products from Domty and then resell them to retailers or wholesalers. Sales to agents represent the second largest sales channel accounting for 27% and 39% of the local sales in 2014 and 2015. Sales through agents represent the main sales channel for the carton pack cheese and juice products. The company intends to gradually reduce the use of agents in Egypt over the coming years as the company intends to grow the distribution network and increase its direct reach. Also the company uses agents for all the export sales.

- Catering – (98 days on credit): Catering involves direct sales to institutions such as hotels, hospitals governmental institutions and

quick service restaurants. Catering sales have suffered from the disruptions that affected the tourism industry in Egypt in the recent years. Catering sales represented 13% and 14% of the total local sales in 2014 and the first 10 months in 2015.

Export Sales:

- Retail- (Mainly cash basis): Direct retail sales is the company’s largest sales channel, accounting for 44% and 39% of the Egyptian sales during 2014 and 10M2015. It is the main sales channel for the fresh cheese products (plastic tub cheese, mozzarella cheese and spreadable cheese), as these products are very sensitive to temperature and require special storage conditions. The company aims to grow its retail channel and increase its contribution to approximately 60% of total direct sales by 2020 in order to increase the control over the value chain and boost its profitability margins.

- Wholesale (45 days on credit): Domty uses wholesalers to help them expand the

geographic reach of the products, covering regions where Domty does not have sufficient distribution capacity to sell directly to retailers. The use of wholesalers increased significantly with the introduction of products with fewer distribution and handling requirements, such as carton pack cheese and juice, which do not require refrigeration and have longer shelf-lives. The wholesale channel sales represented 16% and 8% of the total local sales in 2014 and the first 10 months of 2015.

Retail, 39%

Wholesale, 8%

Agents, 39%

Catering, 14%

Jordan , 31%

Palestine, 14% Libya, 6%

Saudi Arabia , 11%

Kuwait, 14%

Lebanon, 5%

UAE, 3%

Others, 16%

Domty’s export sales began in 1999 with the export of plastic tub cheese to Saudi Arabia and mozzarella cheese to Lebanon and Kuwait. The export sales contributed 8% and 6.5% in 2014 and 2015. Exports sales is crucial for the company, as it provides a portion of the FX requirements for raw materials imports, in 2015, the export sales secured 8-10% of the company’s FX requirements. Currently the company exports to more than 35 countries. The key export markets are primarily located in the MENA region, namely Jordan, Palestine, Libya, Saudi Arabia and Kuwait.

23


OCTOBER, 2016

SOURCE: DOMTY

SALES CHANNELS BY PRODUCT CATEGORY – 10M2015

SOURCE: DOMTY

DOMTY’ DISTRIBUTION NETWORK

The export sales mainly target the Egyptian consumers living abroad, where the cheese exports are directed to the GCC countries, while the juice is also exported to certain European and African countries. Agents are typically used in all the export market, where their credit terms differ depending on the country, but have an average payment term of 75 days.

Russian agreements:

In 2015, Domty entered into an agreement to begin exporting cheese to Russia, benefiting from the supply shortages resulting from the foreign sanctions against Russia. The first deal was made in 2015 and it amounted to USD 20mn. In 2016, the company reached two new agreements to market its products in Russia. The first agreement in 2016 was a four-year, USD 10mn agreement with the Russian retailer Magnit and the second agreement in 2016 was a USD 10mn agreement to supply Russkoe Moloko with Tetra Pak packaged white cheese, where the contract runs till the end of 2017. The three agreements have a total value of USD 40mn. These agreements are of huge importance, as they will enable to company to secure much of the required FX to import raw materials.

East and Sub-Saharan African countries:

Since 2015, the company has been evaluating high potential markets adjacent to Egypt, primarily in East and Sub-Saharan Africa, to benefit from the similar demographics and the underpenetrated cheese and juice markets. This will help the company expand geographically and secure more FX. The company allocated a part of the closed subscription - EGP 70mn – for this expansion. According to management, the negotiations for the expansions in Africa were halted due to the prevailing FX shortage.

- Distribution:

The company has a solid sales and distribution network. The company has 93 distribution centers (Domty’s own distribution centers: 29, distribution centers of agents: 64) and more than 30 smaller warehouses. The company has a fleet of 732 distribution vehicles (Domty’s own and financially leased vehicles: 265, rented vehicles: 166, vehicles of agents: 301) and a sales force of 873. The company has a very large consumer base, where in 2014 it sold to over 85,000 retail consumers in the cheese segment and over 22,000 juice consumers, including consumers common to both segments.

Fresh Cheese Carton Pack Cheese Juice Total

Fleet

Domty 122 215 94 431

Agents 3 143 155 301

Total 125 358 249 732

Distribution Centers

Leased 11 13 5 29

Agents 4 34 26 64

Total 15 47 31 93

Retail, 68% Agents,

4%

Catering , 21%

Exports, 7%

Fresh Cheese

Retail, 28%

Agents, 43%

Wholesale, 11%

Catering , 11%

Exports, 7%

Carton Pack Cheese

Retail, 33%

Agents, 47%

Wholesale, 3%

Catering , 13%

Exports, 4%

Juice

24


OCTOBER, 2016

SOURCE: DOMTY

SOURCE: DOMTY

FRESH CHEESE REACH – SEPTEMBER 2015

JUICE REACH – SEPTEMBER 2015 CARTON CHEESE REACH – SEPTEMBER 2015

Domty intends to use the largest bulk of the proceeds from the closed subscription to expand and upgrade the sales and distribution platform. Before the IPO, Domty used to own 200 vehicles and it used to depend on agents in c20% of its local sales. The company seeks to minimize the reliance on agents in the coming 5 years, so it reaches 8-10% of the local sales. In order to achieve this 8-10% rate, the company would have to own 1,100 vehicles, requiring additional 900 additional vehicles. The company increased its fleet by approximately 200 vehicles in 2016 and it intends to add distribution centers and sales staff in areas where its current coverage is currently limited. The company will focus in the coming period its coverage of the underpenetrated regions along the Nile Delta region.

Supply & Production:

- Procurement:

Domty purchases its raw materials needs from diverse suppliers, enabling it to reduce the impact of short-term price fluctuations and enabling it to secure better payment terms and quality. Domty’s net direct material costs is the company largest component of as cash costs as it represented c80% of the company’s cash cost in 2015. The company’s principal material procurement needs consist of (i) raw materials for the production of cheese and juice products, primarily powdered milk, shortening, raw milk, protein concentrates and fruit concentrates; and (ii) materials needed for the packaging of its products. The company typically imports skimmed milk powder, protein concentrates and Tetra Pak paper and materials. On the other hand, vegetable oil, fruit concentrates, outer cartons and raw milk are locally sourced.

Since its inception, Domty’s sales have been concentrated in a limited

number of key geographic regions. The company focuses mainly on a

small number of big sales outlets. This consequently led to the

numeric distribution (the percentage of outlets that sell the

company’s products out of the total number of relevant outlets in the

market) has historically been smaller than the weighted distribution

(the percentage of outlets that sells the company’s products,

weighted according to the sales volume of the relevant outlets for a

particular period). In September 2015, the carton pack cheese had a

weighted distribution of 91%, compared to a numeric distribution of

54% and the fresh cheese had a weighted and numeric distribution of

30% and 3% respectively. On the other hand, the juice had a weighted

and numeric distribution of 45% and 22% respectively. The company

has a very limited penetration in some rural regions, such as the Nile

Delta region, due to the limited capacity of the distribution resources.

30

53

34

19 13

4 3

12

2 1 2 2

0

10

20

30

40

50

60

Egypt Cairo Alexandria Canal Zone Delta Upper Egypt

Fresh Cheese Weighted Handling Fresh Cheese Numeric Handling

91 99 98 97

74

57 54 59 49

77

40

23

0

20

40

60

80

100

120


Carton Pack Cheese Weighted Handling Carton Pack Cheese Numeric Handling

45

55 53 53 51

35

22

40

17

31 32

13

0

10

20

30

40

50

60


Juice Weighted Handling Juice Numeric Handling

25


OCTOBER, 2016

SOURCE: DOMTY

IMPORTED RAW MATERIALS – 10M2015 LOCALLY SOURCED RAW MATERIALS – 10M2015

NET DIRECT MATERIALS COSTS 2015 CASH COSTS - 2015

In 2015, nearly half of all the raw materials were sourced from local suppliers, where the rest are sourced from international sources to ensure premium quality. The company’s non-EGP revenues cover only 8-10% of the required FX. Till May 2016, the company was able to source all of its required FX from the official banking market. However starting June, the company had to resort to the parallel market, where it had to source c90% from the parallel market at a rate of EGP/USD 12.6-12.7, while the remaining the 10% is sourced from the official banking market.

The company does not hedge any of the raw materials’ costs. The prices of these raw materials hiked in 2013 and early 2014 as a result of abnormally tight market conditions. However the prices of most raw materials have declined significantly since late 2014 as a result of intensive investments in production capacities and favorable weather conditions. Following suit, the prices of the commodities related to the milk market witnessed severe downtrends, mainly due to the following reasons:

- Increases in production capacities. - Greater production in major raw milk producing regions (New Zealand and the US). - The abolishment of the milk quotas in the EU. - Decreased Chinese imports due to stock accumulation. - The Russian imports ban on several dairy products from several major exporting countries.

These shifts are expected to hold down raw materials prices in the short to medium term and we expect the dairy raw materials’ prices to remain favorable.

Net Direct Materials

Costs, 78.70%

Salaries & Wages, 6.80%

Industrial Costs, 5.50%

Advertising & Marketing,

2.70%

Others, 2.20%

Maintenance & Spare

Parts, 2.30%

Vehicles Rents, 1.20%

Warehousing , 0.70%

Sugar, 2.40%

SMP, 21%

Tetra Pak, 21.40%

Veg. Oil, 17.30%

Others, 15.70%

Milk Protein, 7.70%

Juice Conc. , 6.80%

Raw Milk, 5.30%

GDL, 2.40%

GDL, 5.10%

Tetra Pak, 45.90% SMP, 33.10%

Milk Protein, 9%

Juice Conc., 3.70%

Others, 3.20%

Sugar, 4.80%

Veg. Oil, 32.30%

Others, 23.60%

SMP, 11.10%

Juice Concentrates

, 11.10%

Raw Milk, 10.30%

Milk Protein, 6.70%

26


OCTOBER, 2016

SOURCE: DOMTY

SOURCE: DOMTY

CAPACITY ADDITIONS - 2015

- Production:

Domty operates a well invested ISO-certified 6,000sqm factory in Egypt with an annual capacity of 240,369tpa at the end of 2015. The capacity is divided between cheese and juice, where the total cheese capacity and the total juice capacity stood at 175,369tpa and 65,000tpa respectively. Till the end of 2015, the company currently had 20 production lines (including a production line that is used interchangeable for both cheese and juice) as compared to only 5 production lines in 2007. The production lines and equipment are sourced from leading international manufacturers, including Tetra Pak, APV, Primodan, CMT and Trepko, to ensure superior quality and efficiency. In 2015, the company was operating at an average capacity of 68%. The company’s historical average utilization rate has been c75%, where the peak is usually before Ramadan and during the academic year.

Product Category No. of Production Lines Capacity (tpa) - End of 2015

Cheese

Carton Pack Cheese 15 147,169

Plastic Tub Cheese 1 20,400

Mozzarella Chees 1 6,000

Spreadable Cheese 1 1,800

Total Cheese 18 175,369

Juice

1L 1 17,000

250ml 2 48,000

Total Cheese 3 65,000

Total Company 20* 240,369

In order to meet up with the rising demand, the company has historically needed to add production capacity. During 2015, the company added 4 production lines in the carton pack cheese segment, increasing the cheese capacity by c32%. Also the company expanded its capacities in the juice segment, adding 12,000tpa to its juice capacity, representing a rise of 24.8%. During 2015, the overall production capacity rose by 30% reaching 240,369tpa versus 184,946tpa. According to management, during 2016, the total production capacity will be increased by 31% reaching a capacity of 315 thousand tpa, 215 thousand tpa for cheese and 100 thousand tpa for juice.

Segment (tpa) 2014 2015 % Change

Cheese

Carton Pack 104,645 147,169 41%

Plastic Tub 20,400 20,400 -

Mozzarella 6,000 6,000 -

Spreadable 1,800 1,800 -

Total Cheese 132,846 175,369 32%

Juice

1 Litre 17,000 17,000 -

250ml 35,100 48,000 37%

Total Juice 52,100 65,000 25%

Total Capacity 184,946 240,369 30%

In January 2016, Domty announced its plan to invest EGP 100mn in a new factory in 6th of October city on an area of 26,000sqm with a production capacity of 300mn packs per year. The company has begun trial runs for the new factory’s first phase late September, 2016. The company plans to dedicate the existing factory (old factory) to accommodate only the cheese products, where the new factory will be used for the production of juice and the production of the new products including cheese sandwich, hard cheese and other products. The company moved 2 of its existing juice production lines to the new factory, where the third line will stay in the old factory as it is used interchangeably for cheese and juice. This will free up space for 1-2 additional production lines in the old factory.

27


OCTOBER, 2016

As for the warehousing activities, Domty has a central warehouse with an area of 7,500sqm and it is owned by its subsidiary, Tatweer. The warehouse is located in close proximity to the old factory and the new factory.

- Relationship with Tetra Pak:

Since 2012, Domty has been Tetra Pak’s largest white cheese producer in the world. Tetra Pack is the main supplier of packaging materials and machinery. As a result of the strong relationship, Domty enjoys special technical and financial benefits from Tetra Pak and Tetra Pak benefits from Domty’s scale of operations and it perceives Domty’s promotions for carton pack cheese as a promotion for itself. Such a strong relation may act as a barrier to entry for small scale producers and other potential competitors. In the past, Tetra Pak has offered Domty many technical and financial benefits, including:

- Packaging material rebates: Domty receives discounts on packaging material volume procured. Such discounts averaged 20% on the value of Tetra Pak purchases in the last several years.

- Credit terms: Domty usually receives favorable credit terms for packaging material purchases (45-60 days on average).

- Cash discount: Domty receives a discount for the early payment for packaging materials procured. In the past several years, Domty has increased its cash payments so it can benefit from such discounts.

- Marketing Support: Domty receives annual marketing support from Tetra Pak to support the marketing campaigns of the Tetra Pak packaged products. Such support is calculated as a percentage of the marketing budget. Between 2012 and 2014, the support averaged EGP 2.9mn per annum.

- Payment terms for packaging machinery procurement: Tetra Pak gives Domty the option to purchase new Tetra Pak machines on preferential terms, which typically includes payment in non-interest bearing installments over several years, which helps Domty maintain minimal CAPEX expenditure. Domty is able to set off receivables due from Tetra Pak (mainly the discounts and the marketing support arrangements) against the machinery payment installments. This leads to the reduction of receivables due from Tetra Pak and enables Domty to increase its filling capacity with no actual cash outflow.

- Special maintenance and support: Domty receives special maintenance and support services from Tetra Pak, including 2 on-site engineers located in Domty’s facilities.

28


OCTOBER, 2016

REVENUES – EGP MN

REVENUES CONTRIBUTION (%)

REVENUES CONTRIBUTION (%)

SOURCE: DOMTY

Financial Overview:

Revenues:

2014 2015 1H2015 1H2016

Revenues - EGP Mn

% of Total Revenues

Revenues - EGP Mn

% of Total Revenues

Revenues - EGP Mn

% of Total Revenues

Revenues - EGP Mn

% of Total Revenues

Carton Pack Cheese 727.1 64% 919.3 66% 472.9 66% 536.3 68%

Plastic Tub Cheese 152.7 14% 147.7 11% 74 10% 80.2 10%

Mozzarella Cheese 75.1 7% 84.5 6% 40.2 6% 47.5 6%

Spreadable Cheese 8.6 1% 12.6 1% 7 1% 5 1%

By Products 4 0% 6.2 0% 4.4 1% 1.9 0%

Juice 161.7 14% 229.8 16% 114.9 16% 115.6 15%

Total 1,129.2 100% 1,400.1 100% 713.4 100% 786.5 100%

The growth in revenues has been primarily driven by sales volumes. In the cheese segment, during 2012-2015, the sold volumes grew at a CAGR of 20%, while the average prices grew at a CAGR of 0.5%. The growth in juice revenues was also driven by an increase in the sold volumes, where during 2012-2015, the sold volumes grew at a CAGR of 241%, while the average prices dropped by a CAGR of 4%.

Domty has been able to achieve steady growth during the last several years. From 2012 to 2015, sales grew at a CAGR of 28%. In 2015, the company achieved sales of EGP 1,400mn, versus revenues of EGP 1,129mn in 2014, growing by 24% y-o-y. During the 1H2016, revenues stood at EGP 786.6mn, versus EGP 713.4mn in 1H2015, growing by 10.3% y-o-y.

Till 2013, cheese was the sole product segment for the company, where since 2013 the company decided to penetrate the juice market. Cheese remains to be the company’s main segment. Cheese sales represented 84% and 85% of the company’s total sales during 2015 and 1H2016 respectively, where on the other hand, the juice sales represented 16% and 14% in 2015 and 1H2016 respectively.

660

842

1,129

1,400

713 787

0

200

400

600

800

1000

1200

1400

1600

2012 2013 2014 2015 1H2015 1H2016

100% 98% 86% 84% 84% 85%

0% 3%

14% 16% 16% 15%

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 1H2015 1H2016

Cheese Juice

Carton pack is the company’s most successful cheese product, where it contributed 79% and 80% to the total cheese revenues in 2015 and 1H2016 and 66% and 68% to the company’s revenues. Plastic tub cheese, mozzarella cheese and spreadable cheese follow the carton pack cheese with regards to their revenue contribution, where they contributed 11%, 6% and 1% to the company totals revenue in 2015 and 10%, 6% and 0.6% in 1H2016.

29


OCTOBER, 2016

REVENUES BY GEOGRAPHICAL AREAS

SOURCE: DOMTY

SOURCE: DOMTY

Cheese: 2012 2013 2014 2015

Quantity Sold (Tons) 55,612 69,648 76,806 97,164

y-o-y Change - 25% 10% 27%

Average Price (EGP '000s/ton) 11.87 11.78 12.60 12.04

y-o-y Change - -1% 7% -4%

Sales Value (EGP '000s) 660,344 820,367 967,438 1,170,271

y-o-y Change - 24% 18% 21%

Juice: 2012 2013 2014 2015

Quantity Sold (Tons) 0 3,799 30,803 44,176

y-o-y Change -

711% 43%

Average Price (EGP '000s/ton) 0 5.62 5.25 5.20

y-o-y Change

-7% -1%

Sales Value (EGP '000s) - 21,358 161,685 229,804

y-o-y Change -

657% 42%

Majority of the company’s sales are allocated in the local market (especially Cairo), where on the other hand, exports have always represented less than 10% of the sales. The local sales represented 93.5% and 95% in 2015 and 1H2016, where the exports represented 6.5% and 5% in 2015 and 1H2016.

2015 1H2016

EGP Mn. % EGP Mn. %

Local Sales Cairo 615,209 44% 377,011 48%

Alexandria 91,627 7% 94,693 48%

Delta 274,881 20% 149,079 19%

Upper Egypt 327,239 23% 126,665 16%

Export Sales 91,143 6.5% 39,117 5% Total 1,400,098 100% 786,564 100%

- Revenues Assumptions:

Cheese: Carton Pack Cheese: 2016 2017 2018

Quantity Sold (Tons) 93,585 103,585 113,585

Average Price (EGP '000s/ton) 12 13 14

Sales Value (EGP '000s) 1,114,416 1,356,847 1,547,350

Plastic Tub Cheese: 2016 2017 2018



Sales Value (EGP '000s) 184,199 222,881 231,796

Mozzarella Cheese 2016 2017 2018


30


OCTOBER, 2016

SOURCE: PRIME ESTIMATES

COGS – EXCLUDING DEPRECIATION – EGP MN.


Sales Value (EGP '000s) 127809 146214 160835

Spreadable Cheese 2016 2017 2018

Quantity Sold (Tons) 540 630 720


Sales Value (EGP '000s) 16,501 21,176 25,169

By-Products 2016 2017 2018



Sales Value (EGP '000s) 9,419 10,925 12,465

Total Cheese 2016 2017 2018



Sales Value (EGP '000s) 1,452,345 1,758,043 1,977,616

Juice 2016 2017 2018



Sales Value (EGP '000s) 270,504 318,383 357,747

Cheese Sandwich: (100% LOCAL SALES) 2016 2017 2018

Quantity Sold (Mn Packs) 2 26 33

Average Price (EGP/Pack) 2 2 2

Sales Value (EGP '000s) 4,400 52,800 69,300

Hard Cheese: (100% LOCAL SALES) 2016 2017 2018

Quantity Sold (Tons)

313 1,200

Average Price (EGP '000s/ton)

50 53

Sales Value (EGP '000s)

15,625 63,000

Total Revenues: (EGP '000s) 1,743,036 2,189,629 2,528,215

Local Sales: (EGP '000s) 1,634,698 2,050,581 2,341,851

% of Total Sales 94% 94% 93%

Export Sales: (EGP '000s) 108,338 139,047 186,364

% of Total Sales 6% 6% 7%

COGS:

Domty’s COGS (excluding depreciation) stood at EGP 1,015.8mn in 2015, versus EGP 872.8mn in 2014, increasing by 16% y-o-y. In 1H2016, COGS stood at EGP 591mn against EGP 525.9mn in 1H2015, growing by 12% y-o-y.

The net direct raw materials is the largest component of the company’s COGS, where it was c.92% of the total COGS in 2015. The total net direct raw materials’ costs stood at EGP 983mn in 2015, where 82% was for cheese and the remaining 18% was for juice. The company is subject to FX risks, as nearly half of the raw materials are denominated in FCY, where the non-EGP revenues cover only a minimal part of 8-10%

873 1,016

526 591

0

200

400

600

800

1000

1200

2014 2015 1H2015 1H2016

31


OCTOBER, 2016

COGS BREAKDOWN - %

DIRECT RAW MATERIALS - CHEESE DIRECT RAW MATERIALS - JUICE

SOURCE: DOMTY

SOURCE: DOMTY

COGS BREAKDOWN

2012 2013 2014 2015

Total Raw Materials Costs (EGP '000s) 380,000 498,000 668,000 730,000

Total Tetra Pak Costs (EGP '000s) 71,000 113,000 176,000 245,000

Tetra Pak Discount (20% of Tetra Pak Costs) (14,200) (22,600) (35,200) (49,000)

Total Direct Materials Costs (EGP '000s) 436,800 588,400 808,800 926,000

Industrial Costs (EGP '000s) 31,000 41,000 49,000 65,000

% of Revenues 4.7% 4.9% 4.3% 4.6%

Maintenance Costs (EGP '000s) 5,000 8,000 12,000 19,000

% of Revenues 0.8% 1.0% 1.1% 1.4%

Lease Costs (EGP '000s) 5000 3000 3000 4000

Total COGS (excluding depreciation) 477,800 640,400 872,800 1,014,000

Net Direct Materials Cost, 92%

Industrial Costs, 6%

Maintenace Costs, 2%

Lease Costs , 0%

Skimmed Milk

Powder, 24%

Vegetable Oil, 21%

Raw Milk, 6%

Milk Protein Concentrat

e, 9%

Other Raw Materials ,

17%

Tetra Pak Cost, 22%

Juice Concentrate

s, 39%

Sugar, 13% Other Raw Materials ,

7%

Tetra Pak Cost, 42%

The cheese segment is more exposed to FX risks, as the major

raw materials – SMP, vegetable oil and milk protein

concentrate - are imported, where the main raw materials in

the juice segment are locally sourced. The Tetra Pak for

cheese and juice are also imported. The company benefits

from a discount from Tetra Pak, where the discount

represents 20% of the entire Tetra Pak costs. Other minor

costs are included in the COGS – industrial costs, maintenance

costs and lease costs.

32


OCTOBER, 2016

- COGS Assumptions:

Direct Raw Materials Costs

Cheese: 2016 2017 2018

Skimmed Milk Powder Total Cost (EGP '000s) 268,870 384,061 429,851

Cost per Sold Ton (EGP '000s /Ton) 2.47 3.19 3.29

Vegetable Oil Total Cost (EGP '000s) 221,321 316,141 353,834

Cost per Sold Ton (EGP '000s/Ton) 2.03 2.63 2.71

Raw Milk Total Cost (EGP '000s) 57,281 65,805 73,651


Milk Protein Concentrate Total Cost (EGP '000s) 98,603 140,848 157,640


Other Raw Materials Total Cost (EGP '000s) 171,276 196,766 220,225


Tetra Pak Cost Total Cost (EGP '000s) 231,781 324,654 359,833


Direct Material Costs - Cheese 1,049,131.84 1,428,275.56 1,595,034.84

Juice: 2016 2017 2018

Juice Concentrate Total Cost (EGP '000s) 73,954 83,790 94,149


Sugar Total Cost (EGP '000s) 26,536 30,357 34,110


Other Raw Materials Total Cost (EGP '000s) 24,780 28,348 32,162


Tetra Pak Cost Total Cost (EGP '000s) 101,399 141,433 157,376


Direct Material Costs - Juice 226,669.07 283,928.27 317,798.48

Cheese Sandwich 2016 2017 2018

Direct Material Costs - Cheese Sandwich 2,640.00 29,040.00 38,115.00

Hard Cheese 2016 2017 2018

Direct Material Costs - Hard Cheese

10,156 40,950

Total Raw Materials Costs (EGP '000s) 945,261 1,285,313 1,474,689

Total Tetra Pak Costs (EGP '000s) 333,180 466,087 517,210

Tetra Pak Discount (20% of Tetra Pak Costs) -66,636 -93,217 -103,442

Total Direct Materials Costs (EGP '000s) 1,211,805 1,658,183 1,888,456

Industrial Costs (EGP '000s) 78,437 98,533 113,770 -

33


OCTOBER, 2016

SOURCE: PRIME ESTIMATES

GROSS PROFIT – EGP MN.

SOURCE: DOMTY

SOURCE: DOMTY

SG&A – EGP MN.

SOURCE: DOMTY

FX LOSSES – EGP MN.

Maintenance Costs (EGP '000s) 17,430 21,896 25,282

Lease Costs (EGP '000s) 5,000 5,000 5,000

Total COGS (excluding depreciation) 1,312,672 1,783,612 2,032,508

Gross Profit

SG&A:

FX Gains/ Losses:

256

384

187 195

0

50

100

150

200

250

300

350

400

450

2014 2015 1H2015 1H2016

In 2015, gross profit stood at EGP 384mn, against EGP 256mn in 2015, growing by 50%. The huge improvement was the driven by the continuation of the declining prices of raw materials, particularly powder milk, where its price declined by c34% y-o-y. In 2015, the GPM was 27% versus 23% in 2014. In 1H2016, the company achieved a gross profit of EGP 195.5mn, versus EGP 187.5mn in 1H2015, growing by 4.5% y-o-y. In 1H2016, the GPM was 25%, against 26% in 1H2015.

In 2015, the company incurred EGP 172.6mn as SG&A, versus EGP 176.1mn in 2014. The SG&A represented 12.3% and 15.6% of revenues in 2015 and 2014 respectively. In 1H2016, the company incurred EGP 115.7mn as SG&A, versus EGP 77.6mn in 1H2015, growing by 49% y-o-y. The SG&A represented 14.7% and 10.8% of revenues in 1H2016 and 1H2015 respectively.

During 1H2016, the both components of the SG&A – sales & marketing expenses and general & administrative expenses – rose, where they rose by 48% and 61% respectively. The surge can be attributed to the massive marketing activities during the period and the increased distribution costs owning to the company’s strategy for reducing its dependence on third-party agents.

176 173

78

116

160 152

68

101

16.6 20.8 9.4 15.1

0

20

40

60

80

100

120

140

160

180

200

2014 2015 1H2015 H2016

Total SG&A Sales & Marketing General & Admin.

When the company draws foreign currency denominated overdraft

facilities in connection with the purchase of goods denominated in

those currencies, the company becomes subject to FX risks between the

date on which the liability is incurred and the date on which it is repaid.

The resulting exchange rate difference is recognized as foreign

exchange gains and losses. The FX losses skyrocketed in 2015, reaching

EGP 7.2mn versus EGP 1.7mn, rising by 313% y-o-y. The FX losses in

1H2016 was quiet similar to that of the comparable period a year

earlier. FX losses recorded EGP 4.7mn in 1H2016, versus EGP 4.8mn in

1H2015. It is worthy to note that during the 2Q2016, the FX losses rose

by 84%, as it reached EGP 1.06mn against EGP 0.18mn in 2Q2015.

1.7

7.2

4.8 4.7

0

1

2

3

4

5

6

7

8

2014 2015 1H2015 H2016

34


OCTOBER, 2016

SOURCE: DOMTY

NET INCOME – EGP MN.

Net Income:

28.3

128.7

62.1

44.9

0

20

40

60

80

100

120

140

2014 2015 1H2015 1H2016

Domty achieved a net profit of EGP 128.7mn in 2015, versus EGP 28.3mn in 2014, growing by 355% y-o-y. In 2015 the NPM stood at 9.2%, where it stood at 2.5% in 2014. In 1H2016, the company achieved a net profit of EGP44.9mn, versus EGP 62.1mn in 1H2015. In 1H2016, the NPM stood at 5.7%, against an NPM of 8.7% in 1H2015. As previously mentioned, the 49% increase in SG&A is the main reason behind the huge drop in net profit

35


OCTOBER, 2016

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%

Strong Buy x > 40%

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

36


OCTOBER, 2016

PRIME SECURITIES

Hassan Samir Managing Director +202 3300 5611 [email protected]

RESEARCH TEAM

Aboubakr Emam, CFA Head of Research +202 3300 5724 [email protected]

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Arabian Food Industries - Domty - Initiation of Coverage - October 2016

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