At­trac­tive­ness of food sec­tor re­sists prof­itabil­ity mar­gin de­cline

AC­QUI­SI­TION DEALS FO­CUS ON BA­SIC COM­MODI­TIES OVER THE UP­COM­ING PE­RIOD, SAYS EL GAZAYERLY DE­CLINE IN AS­SETS’ DOL­LAR PRICES GIVES FOR­EIGN­ERS GOLDEN OP­POR­TU­NI­TIES

The Daily News Egypt - - Business - By Walaa Ga­mal

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 chair­per­son 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 Danone 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.

EN­TRANCE OF FOR­EIGN COM­PA­NIES SUP­PORTS FOOD PRO­CESS­ING SYS­TEM IN EGYPT

AGRI­CUL­TURAL MAN­U­FAC­TUR­ING IS THE SEC­OND MOST AT­TRAC­TIVE SEC­TOR

The prof­its of Juhayna Food In­dus­tries de­clined by 28% dur­ing the first quar­ter, record­ing EGP 58.3m

Ashraf El Gazayerly, chair­per­son of the Food In­dus­tries Cham­ber in the Federation of Egyp­tian In­dus­tries

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