Attractiveness of food sector resists profitability margins decline

Walaa Gamal
11 Min Read
Ashraf El Gazayerly, the chairperson of the Food Industries Chamber in the Federation of Egyptian Industries (FEI)

A number of investors has agreed that the food sector is still attractive for investment despite the decline in profitability margins under the pressure of flotation in November.

The sector witnessed a noticeable decline in acquisitions over the period that followed the pound flotation compared to the past years given the fear of investors from entering the local market.

Ashraf El Gazayerly, the chairperson of the Food Industries Chamber in the Federation of Egyptian Industries (FEI), said that the decline in profitability margins of food industry companies after the flotation has pushed investors to utilize acquisition opportunities in order to achieve investment revenues on the long term.

He added that the sector is facing some challenges, including the decline in the purchasing power, which contributed to a decline in sales and profits, however, the sector is still attractive for investment on the long term.

El Gazayerly explained that basic goods still have large acquisition chance by investors as they achieve investment revenues in a short period of time.

Moreover, recreational goods now have a basic presence in citizens’ lives as biscuits, croissant, patties, and juices become part of the school meals; all of which enhanced the investment opportunities of the sector in the local market.

He added that funding through partnership with foreign investors has some advantages that can increase the efficiency of products through injecting new investments and using modern technologies as well as using foreign experiences.

He explained that agricultural manufacturing and other sectors that depend mainly on local components have good investment opportunities over the upcoming period as they depend on a higher value added ratio.

El Gazayerly noted that the economic reform plan adopted by the government contributes to controlling the balance of payments, coinciding with a unified price for currencies, which reassures investors.

Mohamed Shoukry, first half (H1) vice chairman of the Chamber of Food Industries, agreed with El Gazayerly. He explained that foreign investors take the economic conditions of companies into consideration whenever they implement acquisition deals, but when conditions are stable, the company restores its value and market share on the medium term.

He explained that the decisions made by the CBE and the government with the aim of restructuring economy had a negative impact on food industries companies causing the business volume to decline from 30% to 50% over the past period.

He added that the decline of US dollar for Egyptian assets as the result of the liberalization of the exchange rate is a golden chance for foreign investors to enter the Egyptian market.

Shoukry added that the food sector has priority in terms of foreign investment, especially that investment revenues of basic goods are a lot faster than those on secondary goods which include biscuits, ice cream and sweets.

He explained that investment revenues on secondary goods will become clear after the stability of economic conditions, noting that the sales of the companies producing these goods have noticeably declined over the past months.

He explained that all food sector fields have points of weakness and points of strength, and investors seek to utilize the investment opportunities in the sector at the right time.

He noted that after finishing the reform procedures, the state will restructure wages and salaries, stressing that the sector increased wages over the past few months and the purchasing power will be able to return strongly.

Shoukry said that funding expansions through increasing capital comes first, followed by bank funding because of the high interests on loans and deposits.

He also explained that the capital cycle in the industrial and agricultural sectors are slow and do not suit the requirements of banks as well as the required guarantees, unlike the case with the commercial field.

The entrance of foreign companies into the field of food industries into the local market has helped create competitive opportunities and increase the quality of the Egyptian products.

Omneya El Hamamy, a financial analyst in Prime, said that the increase of operating costs and imported components from 50% to 80% have contributed to a slowdown in the sector.

She added that since the beginning of the second quarter of 2016, the company resorted to obtaining foreign currencies from the parallel market, and profitability margins have declined significantly.

Then companies increased the price of final products gradually to maintain the market share and avoid weakening the purchasing power.

El Hamamy explained that the first second quarter of 2017 witnessed a decline in the profits of companies as they continued to pass the increase in production costs to the price of the final product after the stability of the dollar price at an average of EGP 18.

The profits of Juhayna Food Industries declined by 28% during the first quarter, recording EGP 58.3m, whereas its profits declined by 8.5% during the second quarter, recording EGP 27.3m compared to EGP 30m the same period last year.

Edita Food Industries managed to achieve profits during the first quarter of 2017 worth EGP 47.8m compared to EGP 39m with 22% increase. Its profits declined by 85% during the second quarter of 2017, recording EGP 7m compared to EGP 48m in the same quarter last year.

Domty Food Industries had its profits turn into losses through recording EGP 6m compared to EGP 24m profits during the first quarter, whereas its profits declined during the second quarter of 2017, recording EGP 12m compared to EGP 20m. El Hamamy pointed out the increase in interest rate three times consecutively, where in November, CBE increased the interest on loaning and depositing by 300 basis points, then by 400 points in May and June, which lead to a decrease in the profitability margins of companies and an increase in debts.

The profit margins of food sector companies have witnessed an improvement at the beginning of the third quarter and will witness more improvements in the last quarter of this year to return back to pre-flotation levels in 2015 and the first quarter of 2016, according to El Hamamy.

She considered 2017 to be an exceptional year and that acquisition opportunities in the sector are still present especially for the goods important for citizens’ everyday life.

She said that foreign investors study the sectors that guarantee revenues. It is expected to seal acquisition deals over the upcoming period in the fields of dairies and children’s meals as these are supported by population growth.

El Hamamy pointed out that the issuance of the investment law and the executive regulations of the license laws as well as the stability of the exchange rate have conveyed a message to foreign investors to enter the local market.

Ayman Abo Hend, director of direct investment in Cartel Capital, said that the upcoming period will witness more foreign investments in the sector of basic goods.

He added that agricultural manufacturing comes second because foreign investors seek to fill the gap of the local market’s needs of basic goods to achieve fast revenues.

Abo Hend explained that local stocks have become cheaper for strategic investors to establish new companies over the upcoming period.

Hassan El Fandy, the head of the sugar and sweets division in FEI, said that the juices and dairies sector is very attractive for investment as its purchasing power is not affected by the prices hike.

He added that growth rates in the food sector will witness an improvement in 2018 especially after the stability of the exchange rate at EGP 18 per dollar and the companies’ ability to calculate the production costs at a stable price.

He added that the phases to establish a factory and operate it takes from two to three years. Economic conditions are expected to stabilize with the government’s current trends. He pointed out that bank financing comes first as a way to fund projects and expansions.

El Fandy explained that CBE launched three initiatives for financing by 5%, 7%, and 12%. They are expected to help manufacturers establish new factories with reduced interest rates.

El Fandy added that foreign companies entering into the food sector to invest contributes to creating investment opportunities for companies working in the local market to increase the quality of local products.

HE added that the entrance of Nestle, Cadbury, El Maraai, and Danon have contributed to providing more jobs and developing the food sector in Egypt. He explained that the sweets sector is one of the most attractive with great growth opportunities.

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