ADNOC Distribution (ADD) posted its results for 1Q18 showing net profit of AED542.2mn, up 12% Y-o-Y on a stronger top-line and robust margins. Revenues grew 13% to AED5,159mn as volumes were up 0.9% (to 2.3bn litres) and on higher oil prices (pump prices are reset monthly). Gross profit rose 14% Y-o-Y, coming in at AED1.185bn as retail fuel gross profit grew 14% Y-o-Y, mostly due to the increase in margins of fuel products as a result of the new Refined Products Supply Agreement with ADNOC, in addition to the positive impact on inventory from increasing oil prices. Gross margin widened 40bps Y-o-Y to 23.0%. Distribution and admin (D&A) expenses increased c12% Y-o-Y as ADD started reflecting the cost of providing refueling services for airline customers from 1 Oct 2017, depreciation increased (+12%) post the transfer of some refining assets from Takreer and the impact of new service station openings. However, excluding depreciation for both periods and the impact of the Civil Aviation Supply Carve-out, D&A expenses fell c8% Y-o-Y due to reduced: staff count; distribution and marketing; and repairs; maintenance; and consumable costs. EBITDA grew 25% to AED702.8mn, mainly due to higher fuel margins, while EBITDA margin widened 60bps to 21.7%. Operating profit rose 20% Y-o-Y to AED578mn with EBIT margin +70bps to 11.2%.   
 
Segment details: 
      Total retail revenues (71% of total revenues): +10% Y-o-Y to AED3,645mn, gross profit +16% on higher fuel margins (due to new supply agreement with the parent effective 1 Oct 2017) and the positive impact of higher oil prices (gross margin per litre AED0.43 +17%), while segment EBITDA +49% due to higher fuel margins and cost efficiencies. 
      Fuel retail revenues (67%) +10% to AED 3,471.1mn mostly due to the increase in fuel prices (on higher oil prices) which was partly offset by a 1.7% dip in volumes. Thruput per station (ltrs) dipped 5% Y-o-Y, no. of fuel transactions +4%. The company noted that it did not see a material impact from the implementation of the VAT (started in Jan 2018). 
      Non-fuel retail revenues (3%) inched up +0.9% to AED173.9mn as average basket size rose 13%. 
      Added three new fuel stations in 1Q18 to reach 362 locations and three c-stores (238 total). The company will launch three new stations in Dubai in 2018 and at least one in KSA. 
      Launched its ADNOC Flex option, which introduces a greater choice of fueling services, and will continue to introduce it throughout the rest of the country in 2Q18 and 3Q18. First Géant Express store opened in Abu Dhabi with more to be launched this year. 
      Commercial segment revenues (c18) +10% mainly due to the increase in fuel volumes sold (+7% mostly on diesel sales and LPG) and higher average selling prices. Gross profit -22% Y-o-Y, mainly on lower fuel margins due to competitive pressures, partially offset by the higher volumes of fuel sold. Accordingly, EBITDA fell 33%. 
      Aviation revenues (10) rose 50% Y-o-Y due to inclusion of revenues derived under the Aviation Services Agreement with ADNOC in 1Q18 and a 10% increase in volumes, as well as higher average selling prices. Gross profit +83%, EBITDA +54%. 
 
Other:
      Capex of AED153mn in 1Q18 (vs. AED1,458mn in FY17) with AED70mn spent on new fuel stations. The company’s guidance for 2018 capex is less than AED700mn, while capex on new stations will be cut 10% in 2018 and 40% in 2019.
      Dividend on track; to pay USD400mn in dividends for 2018 (pending Board approval).
 
Our view: An overall positive reading of the results set – particularly with margin widening and the ongoing effort to cut costs – improve the non-fuel retail segment performance, which we expect to continue to bear fruit throughout the rest of the year (EFGe net income growth of c14% in 2018e). We have a Buy rating on ADD, as we continue to like its: i) best-in-class profitability (LT net margin c10%, ROAE c40%+); ii) high site throughputs; iii) strong parent support; and iv) potential from boosting high-margin, non-fuel revenues that should drive 2018-19e earnings CAGR of 17%. 

Hatem Alaa, Nada Amin
 
ADNOC Distribution (AD): AED2.44 as of 15 May. 2018, Rating: Buy, TP: AED3.20/share, MCap: USD8,311mn, ADNOCDIS UH/ADNO.AD