Delta Sugar

1H FY10 Update
Target Price LE24
Share Data Report Date Company Short Name Sector Company Traded Market Report Reason Valuation Methodology Exchange Rate Stock Currency Reuters Code Outstanding Shares (mn) Par Value/Share (LE) Financial Year Ending Mkt. Cap (LE mn) Weight to PGI Price Low High (LE) (52Wk.) Shareholders Sugar Integrated Industries Co. National Investment Bank Kima Misr Insurance Co.
Ministry of Religious Endowments

Market Price LE16.28

August 12, 2010
Delta Sugar Food EGX 1H FY10 Update SOP LE5.68/US$ LE SUGR.CA 123.65 5 December 2,013 0.4% 14.08-26.82

Recommendation Strong Buy

Upside Potential 47.5%

Investment Grade Growth

Delta Sugar reported a top line figure of LE387 million in 1H FY10, an annual increase of 96% as sugar prices are still higher than the prices before the Indian production crisis mid 2009. EBITDA margin surged from 32.6% in 1H FY09 to 41.4% in 1H FY10. The bottom line figure increased by 132.7% y-o-y hovering at LE114 million distributed as following: LE44.5 million in Q1 and LE69.4 million in Q2. Sugar prices will be under the mercy of climate conditions in our forecast horizon and bearing in mind the difficulty to forecast these conditions, the prices will be volatile going ahead. The global demand for sugar will remain strong increasing annually by 34 million tons as emerging economies boost their economic growth and world population growth remain high. However, with no dramatic change is forecasted in demand realities, the equation will be one-way, in other words the price will be based on supply-side condition which depends on many factors most importantly climate change and prices of competitive crops such rice and wheat. Our forecasts for FY10 reveal a top line figure of LE1.14 billion, revealing an annual positive change of 14% from last years LE1 billion figure. Owing to the increase in sugar prices on annual basis, our expectations for the EBITDA margin stand at 35%, noting that last year Delta Sugar has not fully capitalized on the unprecedented increase in global sugar price as most of the year production and inventory was sold at relatively law prices, almost LE2.75k/ton, as the company feared a drop in prices and accumulation of inventory especially the existing warehouses were not sufficient. As for the bottom line figure, we are hopeful to see Delta Sugar achieve LE347 million. We have not included in our assumptions the new plant that is expected to be set up in Al Sharkia Governorate till the company starts actual steps to provide financing for the project. Delta Sugar has this project in its plans several years ago but successive delays stem from the failure to obtain required licenses and land to set up the plant in Al Sharkia governorate. Once the project materializes, the new line will add 150k tons of sugar, 66k tons of fodder and 60k tons of molasses. Our SOP model generated a target value of LE24/share though adopting a perpetual growth rate of 3% and a high discount rate of 16.27% due to the prevalence of equity financing in the company's capital structure which is usually associated with high required return. The new target price constitutes a downgrade from our previous target value of LE25 published in our Strategy Report dating back to April 2010. The recommendation downgrade came at the back of expected adjustments in sugar prices and EBITDA margin. At the new target price, the stock is trading at an upside potential of 47.5%. On a multiple basis, the stock is trading at a discount of 37% from a global peers P/E 2010 of 10.9x.
Fiscal Year Ending Dec. Total Revenues (LE mn) 2008a 734 2009a 1,000 2010e 1,139 2011f 1,098 2012f 1,036

Ownership Stake 54% 6.5% 6.5% 13% 6.5% 3% 11% Ahmed El Hindawy +202 3300 5719 Aelhindawy@egy.primegroup.org

Nasser Bank Free Float Analyst Phone Email

Stock Performance Chart (LE / Share)

LE

30 25 20 15

700 600 500 400 300

Growth
EBITDA Margin Net Income Net Attr. Income EPS (LE)

-32%
40.3% 193 169 1.4

36%
12.7% 102 90 0.7

14%
34.7% 336 295 2.4

-3.5%
35.2% 331 291 2.4

-5.7%
33.7% 305 268 2.2

10 5 0 May-10 Mar-10 Aug-09 Nov-09 Feb-10 Dec-09 Sep-09 Aug-10 Oct-09 Apr-10 Jun-10 Jan-10 Jul-10

200 100 0

EPS Growth
DPS (LE) BVPS (LE) P/Ex Dividend Yield (%) P/BVx EV/Sales x EV/EBITDA x

-40%
1.50 8.3 11.9 9.2% 2.0 1.8 14.5

-47%
0.75 7.4 22.4 4.6% 2.2 1.3 3.7

229%
1.90 9.0 6.8 11.7% 1.8 1.3 3.8

-1.5%
2.14 9.2 6.9 13.2% 1.8 1.4 4.2

-7.9%
2.22 9.1 7.5 13.6% 1.8 1.4 4.1

Volume (k)

Price

Please refer to disclaimer on last page

Source: Delta Sugar & Prime Estimates

Prime Research

Delta Sugar
1H FY10 Update
A Rebound on Better Prices

August 12, 2010

Egypt

Delta Sugars top line elevated 96% in 1H FY10, as sugar selling prices strengthened on annual basis, ending the period at LE387 million up from LE197.3 million in the same period last year. And as normal, revenues from the sugar segment continued to be the major contributor and growth driver for the top line figure generating almost 70% of the top line figure.
The top line elevated 96% in 1H FY10.

Contribution to Sales per Product1H FY10

80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Sugar Molasses Fodder 13.7% 16.5% 69.8%

Sugar sales in 1H FY10 amounted to LE270 million. Molasses increased 82.8% y-o-y standing at LE53 million while fodder revenues dropped 3%

Sugar sales in 1H FY10 amounted to LE270 million, a 165% increase over 1H FY09 when the sugar producer was not able to fully compete with the locally refined imported sugar. On a quarter basis, sugar sales in Q2 were 55% higher the figure posted in Q1 and almost 198% above Q2 FY09. This came as the average selling price in 1H FY10 scored almost LE3300 per ton from LE2750 per ton in the comparable period last year. In the meantime, molasses increased 82.8% y-o-y standing at LE53 million while fodder revenues dropped 3% to LE64 million in 1H FY10.
Change in Sales per Product (in 1H FY10)
180.0% 160.0% 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% Sugar Molasses Fodder -3.0% 82.8% 164.7%

Sales Segmentation (LE million)

180 160 140 120 100 80 60 40 20 Sugar Molasses
Q1 FY10 Q2 FY10

164

106

46 7

34

30

Fodder

Higher prices translate into higher margins

EBITDA margin increase from 32.6% in 1H FY09 to 41.4% in 1H FY10.

The soaring sugar price led the EBITDA margin further to jump from 32.6% in 1H FY09 to 41.4% in 1H FY10. A quarter comparison shows the margin advancing from 39.5% in Q1 FY10 to 42.6% in Q2 FY10. Towards the bottom line, depreciation expense rose moderately by 0.9% concluding the period with LE15.5 million while interest expense amounted to LE7 million from overdraft to pay farmers. By the end of June 2010, total outstanding debt attained LE442 million representing the overdraft drawn to pay farmers thats expected to disappear from year-end financials after the sale of inventory. To sum up, the bottom line figure increased 132.7% y-o-y hovering at LE114 million distributed as following: LE44.5 million in Q1 and LE69.4 million in Q2 FY10.

The bottom line figure increased 132.7% y-oy.

Prime Research

Delta Sugar
1H FY10 Update
Climate Change will be the main player

August 12, 2010

Egypt

Climate change will be the main factor in the price equation.

Sugar price will basically depend on climate change in the coming years as no major increase in demand is forecasted to lead prices. However, the uncertainty regarding climate changes will keep sugar prices at relatively higher levels compared to the pre-Indian crisis last year. Demand for sugar is forecasted to stand at 157.7 million tons in 2010/2011, an increase of 3.5 million tons while production is seen higher 12 million tons compared to last year nearing 164 million tons as better monsoon rains will boost Indian production this year. Brazil, India, Thailand and China are the major producers of sugar capturing over 50% of global production, and that explains why the sugar price is very sensitive to changes in these countries. Several reasons have contributed to the increase in selling prices since May 2010, mainly delays in shipments from Brazilian ports due to rains, and purchases by major countries. This week witnessed an offer from Pakistan to buy 175k tons of sugar. The lowest price submitted was from Al-Khaleej Sugar Co. of Dubai at US$674.8/ton. The Russian drought will raise expected importation of sugar from anticipated 2.8 million tons this year according to the US Department of Agriculture as a great part of crops may be damaged.
Global Sugar Price (US$/Ton)
800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 Jun-09 Jul-09 May-09 Nov-09 Dec-09 Apr-10 May-10 Feb-09 Mar-09 Feb-10 Mar-10 Jun-10 Jan-09 Jan-10 Jul-10 Aug-09 Aug-10 Apr-09 Sep-09 Oct-09

Russian drought affected prices.

Source: Bloomberg

Exceptional Season in Egypt Despite the capacity increases in the local market in the last two years, market dynamics are still attractive for sugar producers with consumption increasing by 170k tons this year and a long run 50k tons driven by the population growth and the expansion seen in the confectionary industries and packaged food. We do not expect the government to re-impose tariff on white sugar imports as long as sugar prices are above US$450/ton and above this price, competition between sugar producers from sugar beet and refineries of imported sugar will be fairer. Egypts sugar production is estimated to increase to an unprecedented level at 2 million tons in FY10 according to the Ministry of Agriculture as the lower prices of other main crops were not attractive for farmers especially in the areas which sugar beet is cultivated. The key factors behind the new level of production can be also traced to the horizontal increase in sugar beet land to 362k feddans that produced 7.4 million tons of beet. In addition, the average production soared to 20.44 tons per feddan. On the other hand, sugar consumption will amount to 2.7 million tons reducing the import gap from 1 million tons last year to 700k tons only.

Sugar production is estimated to increase to unprecedented level in FY10.

Prime Research

Delta Sugar
1H FY10 Update Forecast and Valuation

August 12, 2010

Egypt

Our forecasts for FY10 imply a top line figure of LE1.14 billion, revealing an annual change of 14% from last years LE1 billion figure. Overall, we assumed an average price of LE3,190 per ton for FY10 versus LE805/ton for molasses and LE635/ton for fodder. The company's financials for the year will also reveal more sales of sugar as we believe that sugar sold during Q1 amounted to 79k tons. In Q1 FY10, 30k tons of sugar were sold at an average price of LE4000/ton, however sales stopped during March due to lower prices as we heard from the companys chairman last April in the company's GA. Owing to the increase in sugar prices on annual basis, our expectations for the EBITDA margin stand at 35% and will slip slightly going forward as we forecast higher prices in the next years for competitive crops that will require higher prices for farmers while sugar prices will be locked by the government's sugar committee to reduce inflation pressure especially as the government is seeking to reduce the subsidies burden. In addition, some farmers cultivate sugar beet without contracts with the company and by the end of the season the production is delivered to Delta Sugar. However, as the monopoly of Delta Sugar in the beet market ended overtime, theres a chance to sell this production to other sugar factories.
Revenues (LE million) 1200 1000 800 600 400 200 0 2010e 2008a 2009a 2011f 2012f
2011f

Revenues to increase % in FY10 and EBITDA to move to %.

EBITDA margin 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: Delta Sugar& Prime Estimates

The net income will grow % in FY10.

Predicting an investment income of LE57 million, from the company's stakes in Al Fayoum and Al Nubaria Sugar, we are hopeful to see Delta Sugar achieve LE347 million.
400 350 300 250 200 150 100 50 0 2010e 2008a 2009a 2012f
Net Income (LE million)

SOPT model generated a target value of LE24.1/share

Valuation

Source: Delta Sugar& Prime Estimates

Our SOP model generated a target value of LE24.2/share though adopting a perpetual growth rate of 3% and a high discount rate of 16.27% due to the prevalence of equity financing in the company's capital structure which is usually associated with high required return. Weve valued the company's stake in Fayoum Sugar and Nubaria Sugar at LE929 million.
Sum Of The Parts LE 000 Delta Sugar Stand Alone Investment Value Total Value Method DCF DDM SoP Value 2,066,913 929,066 2,995,979 24.1 Percentage Contribution 69% 31% 100%
Source: Prime Estimates

Prime Research

Delta Sugar
1H FY10 Update
Income Statement Revenues 2009a 1,000.0 2010e 1,138.7 2011f 1,098.4

August 12, 2010

Egypt
2012f 1,035.8 2013f 1,062.2

Growth
COGS S,G & Admin. Expenses EBITDA

36.3%
858.5 14.5 127.1

13.9%
727.5 16.5 394.8

-3.5%
696.3 15.9 386.2

-5.7%
671.4 15.0 349.4

2.5%
683.6 15.4 363.2

Figures in LE million

Growth EBITDA Margin

Depreciation & Amortization Operating EBIT Interest Income Investment Income Interest Expense Non-Operating Revenues Pre Tax Income Income Tax NPAT

-57% 13%
29.3 104.0 11.9 6.4 8.7 5.9 119.6 17.3 102.2

211% 35%
30.6 364.2 13.4 57.1 11.9 -6.1 416.7 80.4 336.2

-2% 35%
31.5 354.7 13.6 64.4 13.6 -6.6 412.6 81.2 331.3

-10% 34%
32.8 316.6 21.3 66.8 15.7 -7.1 381.8 76.7 305.1

4% 34%
33.8 329.4 15.2 82.2 19.2 -7.7 400.0 81.9 318.0

Growth
Net Income Less : Non-Appropriation Items Net Attributable Income - NAI

-47%
102.2 12.5 89.7

229%
336.2 41.2 295.0

-1%
331.3 40.6 290.7

-8%
305.1 37.4 267.7

4%
318.0 39.0 279.0

Growth ROS
Balance Sheet Cash & Marketable Securities Trade Receivables-Net Inventory Other Current Asset Total Current Asset Net Fixed Assets Other Assets Total Assets Accounts Payable Other Current Liabilities Total Current Liabilities Provisions Total Shareholders' Equity Total Liab.& Shareholders' Equity Free Cash Flow Statement NOPLAT Non-Cash Items Gross Cash Flow Gross Investments Non -Operating Cash Flow Free Cash Flow Financing Flow Interest Income After-Tax Investment Income After-Tax Increase in Excess Cash & M. Sec. After-Tax Interest Expense Dividends Paid Non-Appropriation Items Shareholders Equity Total Financing Flow

-47% 9%
2009a 172.2 0.1 146.0 49.1 367.5 452.0 267.2 1,098.8 11.3 86.9 98.2 60.2 920.4 1,098.8 2009a 86.6 23.0 109.6 -88.4 5.0 203.0 -11.8 -6.3 -1.2 7.4 92.7 12.5 105.9 203.0

229% 26%
2010e 547.6 15.1 218.8 85.4 866.9 447.9 296.5 1,623.7 13.3 141.9 431.8 60.2 1,111.7 1,623.7 2010e 281.7 30.6 312.3 103.3 -4.9 204.0 -13.1 -56.0 395.2 9.6 -41.2 41.2 -131.7 204.0

-1% 26%
2011f 557.8 12.5 230.5 82.4 883.3 452.0 329.6 1,676.1 13.3 139.6 458.5 60.2 1,137.4 1,676.1 2011f 271.0 31.5 302.6 42.5 -5.3 254.8 -13.4 -63.2 43.8 10.9 236.0 40.6 0.0 254.8

-8% 26%
2012f 540.5 13.3 218.6 77.7 850.1 447.2 363.8 1,669.8 12.9 134.3 459.2 60.2 1,130.5 1,669.8 2012f 237.1 32.8 269.9 14.6 -5.7 249.6 -20.8 -65.5 17.7 12.6 268.3 37.4 0.0 249.6

4% 26%
2013f 518.4 15.8 211.1 79.7 824.9 442.2 406.1 1,682.7 13.6 140.4 479.3 60.2 1,123.3 1,682.7 2013f 243.9 33.8 277.7 20.0 -6.1 251.7 -14.9 -80.6 19.8 15.3 273.0 39.0 0.0 251.7

Prime Research

Delta Sugar
1H FY10 Update

August 12, 2010

Egypt

Stock Recommendation Guidelines

Recommendation Strong Buy Buy Accumulate Hold Reduce Sell Strong Sell Target-to-Market Price (x) x > 25% 15% < x <25% 5%< x <15% -5% < x < 5% -15% < x < -5% -25% < x < -15% x < -25%

Investment Grade Growth Value Income Speculative

Explanation 3 Yr. Earnings CAGR > 20% Equity Positioned Within Maturity Stage of Cycle Upcoming Dividend Yield > Average LCY IBOR Quality Earnings Reflect Above Normal Risk Factor

Prime Research

Delta Sugar
1H FY10 Update
PRIME SALES TEAM
Sherif Nabih Heba Abadir Shawkat Raslan Ahmed Al seesi Ramy El Agamy Amr Alaa, CFTe Mohamed Magdy Osama Mahmoud Mohamed Khaled Hafez Amr El Sebaee Group Head Global Securities Brokerage Deputy manager-Gulf & MENA Desk Head of Sales Assistant Manager International Desk Assistant manager, International Desk Team Head, Local Institutional Desk SRMGulf & MENA Desk SRM, Institutional Sales RM, International Manager, High Networth +971-2-6910758 +202 3300 5617 +971-2-6910713 +202 3300 5624 +202 3300 5620 +202 3300 5609 +202 3300 5653 +202 3300 5623 +971-2-6910702 +202 3300 5672

August 12, 2010

Egypt

snabih@uae.primegroup.org habadir@egy.primegroup.org sraslan@uae.primegroup.org aalseesi@egy.primegroup.org relagamy@egy.primegroup.org aalaa@egy.primegroup.org mmagdy@egy.primegroup.org omahmoud@egy.primegroup.org mkhaled@uae.primegroup.org asebaee@egy.primegroup.org

PRIME INVESTMENT RESEARCH

Mohamed Seddiek Rehab Taha, CFA Monette Doss Angad Rajpal Mostafa Maghraby Ahmed Hindawy Karim Osman Radwa Abulnaga Heba Monir Heba Sherif Hind Panicker Nihal Zaki, CFTe Lara Ahmed, CFTe Head of Research Manager Assistant Manager Team Head Senior Analyst Analyst Analyst Analyst Junior Analyst Junior Analyst Junior Analyst Senior Technical Analyst Technical Analyst +202 3300 5720 +202 3300 5724 +202 3300 5726 +971-4-407 0119 +971-4-407 0116 +202 3300 5719 +202 3300 5716 +202 3300 5718 +202 3300 5722 +202 3300 5717 +202 3300 5727 +202 3300 5725 +202 3300 5721 mseddiek@egy.primegroup.org rtaha@egy.primegroup.org mdoss@egy.primegroup.org arajpal@uae.primegroup.org mmaghraby@uae.primegroup.org aelhindawy@egy.primegroup.org kosman@egy.primegroup.org rabulnaga@egy.primegroup.org hmonir@egy.primegroup.org hsherif@egy.primegroup.org hpanicker@egy.primegroup.org nzaki@egy.primegroup.org lahmed@egy.primegroup.org

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