Consumer is “an attractive sector in a challenged market.”Soaring inflation and successive devaluations of the EGP in recent months has triggered a wave of uncertainty among investors in Egyptian stocks. HSBC has updated its outlook for five EGX-listed companies in the consumer sector in a report by Nicholas Paton and Anup Kataria dated 28 July.

The companies: Cheesemaker Domty, Edita Food Industries, GB Corp — formerly known as GB Auto — dairy company Juhayna, and carpet maker Oriental Weavers.

Paton and Kataria are downgrading Juhayna to hold — and think GB Corp has the most upside to their current target price.

REMEMBER- Inflation accelerated at a record pace in June as the impact of multiple currency devaluations combined with higher seasonal demand to send food prices soaring. Annual urban rate of inflation rose to 35.7% y-o-y during the month.

HSBC is expecting a solid 2Q earnings season for consumer firms: “We see profit growth across companies mainly aided by the price increases with the trailing effect of low cost inventory,” the bank said. Look for a margin squeeze in 3Q, “followed by improvement in 4Q as price increases take effect.”

The backdrop could be better: “The past four years have seen a deterioration in investor interest in Egypt, with concerns on currency inflexibility, the creeping influence of the state, and lack of progress on reform,” the bank said.

Consumer stocks are attractively priced right now if you’re comfortable with the FX overhang: HSBC notes that while the EGX has “rallied 20% in USD [terms]” from this year’s lows, consumer stocks are trading at PE of 8.9x against a five-year average of 10x — meaning “ overall valuations are close to all-time lows,” the analysts write.

THE BREAKDOWN-

#1- Domty: The cheesemaker is now looking at an HSBC target price of EGP 11.30 from a former target of EGP 7.60, implying 33% upside on the current price. The 2023 revenue forecast is up 17% on HSBC’s prior forecast to EGP 7.2 bn and the 2024 revenue forecast up 22% to EGP 8.3 bn, “due to price hikes across segments.”

Downside risks: Patton and Kataria say any delays in receivables would stretch Domty’s working capital, adding that entry into new segments could hit margins.

#2- Edita: The company sees its target price increase to EGP 23.70 a piece from EGP 17.50, suggesting some 26% upside to current price. HSBC’s 2023 revenue forecast for Edita is up 30% to EGP 11.3 bn, while the 2024 revenue forecast is up 16% to EGP 11.6 bn. “Price hikes across segments” will drive the growth.

Downside risks: The bank sees worse-than-expected price inflation and entry to new segments impacting margins as potential risks.

#3- Juhayna: The company is now looking at a target price of EGP 13.20 from EGP 9.80, a 0.5% upside, according to the bank. HSBC revised its revenue forecast for Juhayna to EGP 13.9 bn this year, up 7% from previous forecasts as the company pivoted to “focus on exports of concentrates which had much higher margins.”

Downside risks: HSBC sees raw material price volatility as a risk, as well as an increase in competition.

#4- Oriental Weavers: The bank now sees the carpetmaker’s target price rising to EGP 18.30 from a previous EGP 13.10, a 25% upside to current prices. Revenue forecast is up 18% to EGP 17.4 bn this year, and up 17% in 2024 to EGP 18.2 bn, “due to the higher than expected EGP depreciation.”

Downside risks: The bank believes that tougher competition, an increase in raw material prices, or export delays could hurt the company’s performance.

#5- GB Corp: The bank sees the company’s target price increasing to EGP 9.40 a piece from its previous EGP 8.00, suggesting 46% upside from the current share price . GB Corp stands out as the only company for which the bank has trimmed its revenue forecast. HSBC now sees the company recording revenues of EGP 20.9 bn this year, down 34% from previous forecasts, and revenues of EGP 31.6 bn in 2024, down 12%. “We lower our volume estimates for 2023 for Egypt passenger cars and two wheelers due to supply shortages due to FX availability and import restriction.”

Downside risks: The bank cites a potential EGP devaluation as one of the downside risks of investing in GB Corp, seeing as it would result in price hikes, hurting sales in the process. It also zeroes in on supply and demand risks.

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