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Dailynewsegypt > Blog > Business > Positive expectations for the performance of food producers despite inflation and interest rates
Business

Positive expectations for the performance of food producers despite inflation and interest rates

Fatma Salah
Last updated: 2022/05/09 at 4:09 PM
By Fatma Salah 8 Min Read
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Prompted by the effects of the Russian-Ukrainian conflict coinciding with the recovery in demand after the coronavirus pandemic receded, food prices rose by 34% in 2021 and 12.6% between March 2021 and February 2022, according to the data of the Food and Agriculture Organisation (FAO) Food Price Index.

The FAO also expected that food prices would increase further by 8 to 22% during the coming period.

However, a recent report issued by Credit Suisse Bank in the US indicated that food prices as of 19 April 2022 are still 20% lower compared to its last price peak.

In its report, the bank pointed out that the food commodity price cycle often takes 42 months, while currently only 20 months have passed since the price hike of food commodities, and that food commodity prices, according to historical data, rise by about 68% until their price cycle is completed, compared to only an increase of 40% until April 19, 2022.

It added that the rise in food commodity prices globally is due to several reasons, including the Russian-Ukrainian war, as the two countries are very important for the production of wheat, corn and sunflower oils, as well as the production of fertilisers.

The high prices of food commodities globally are also driven by high energy prices, bad weather that harmed agriculture in agricultural commodity-exporting countries, the use of agricultural land to absorb carbon, disruption in the growing season in China due to closure measures to limit the spread of the coronavirus.

Mubasher Securities Research believes that the companies benefiting from the current repercussions are ones that specialise in agricultural commodities, the production of agricultural machinery and equipment, and fertilisers — such as Delta Sugar, MOPCO, Financial and Industrial, Abu Qir Fertilisers, Egyptian Chemical Industries, and Kafr Al-Zayat for Pesticides and Chemicals.

On the other hand, the effects on the local food sector’s producers varied, with most expectations pointing to a positive performance for food producers this year despite the rise in inflation and interest rates.

Furthermore, Al-Ahly Pharos Securities Brokerage expects that the decisions to raise interest rates and depreciate the currency will have a negative impact on the net income of Obour Land for Food Industries during the current quarter, expecting net profit to face some pressure, as the company can raise its borrowing rates in the short term to finance its purchases of inventory according to current market prices.

It added that Obour Land’s strategy of gradually raising prices will positively affect the total revenue and that the company has a great advantage represented in the sales of white cheese, which constitute 93.3% of total sales.

Moreover, it explained that white cheese is one of the main sources of protein for the Egyptian consumer, and that the company has the flexibility to raise its prices without affecting volume levels significantly.

Al-Ahly Pharos also pointed out that companies applied price increases to maintain margin levels from the significant rises in commodity prices and the devaluation of the local currency, both of which pose inflationary pressures on expenditures, and despite the price hikes, volume levels are expected to be negatively affected, which is noticeable from the first quarter (1Q) of 2022.

However, sales of products that are not essential in the life of the Egyptian consumer recorded a decrease accompanied by a decrease in volumes, and price increases did not compensate for the decrease in volume levels.

Despite this, the company was able to record positive levels of overall profits and margins, supported by the increase in the price structure of products.

Total profits amounted to EGP 200m compared to EGP 170m in 4Q of 2021 and EGP 157m in 1Q of 2021 (+1.3% quarterly, +42.7% annually).

The gross profit margin reached 21.7% during 1Q 2022, compared to 19.2% in 4Q of 2021 and 23.6% in 1Q of 2021.

The company also stated that the prices of skimmed milk powder and palm oil — the basic raw materials in the company’s production cycle — reached record highs in 1Q of 2022 compared to previous quarters, bringing the average price of palm oil to $1,400 per tonne in 1Q — a growth of 51% over an annual basis.

As for skimmed milk powder, its average price reached $4,180 per tonne with a growth of 30% y-o-y.

Research also indicated that the company recorded a historical revenue level of EGP 924m in 1Q of 2022 — an increase of 4.5% on a quarterly basis and 39.2% on an annual basis.

White cheese sales accounted for 93.3% of all sales, as it is the only product line that achieved positive growth on both the annual and quarterly basis.

However, volumes saw a quarterly decrease of 1.3%, but rose y-o-y to 30,200 tonnes.

Additionally, average selling price was one of the main factors behind strong business results, rising 5.9% Q/Q and 13.4% y-o-y.

Al-Ahly Pharos set the fair value of the company’s share at EGP 7.70 per share, while the stock is trading at earnings multiple of 7.1 times for the year 2022.

Moving on, Beltone Securities Research said that the prices of food commodities rose to unsustainable levels and are expected to witness a correction most likely by the second half (2H) of 2022 thanks to favourabke expectations for production, the easing of labour shortages, and the decline in demand from China and India, where the storage activity of both countries is a major contributor in the current rise in commodity prices.

Beltone also expected that this will not be reflected in production costs before 2023, as companies mostly resort to increasing their stocks of raw materials at the current rising levels to prevent potential disruptions to supply in light of the global shipping crisis.

Listed food companies began to pass cost inflation through direct and indirect price increases, which would raise some profit margin pressures, suggesting that profitability would improve on a quarterly basis from the lowest expected levels in 2021 for Edita and Domty, and to a lesser extent improve for Juhayna.

And it is likely that Obour Land’s profit margins will decline in 2022 after the company’s inventory of low-cost raw materials has run out.

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