• Earnings up 18% Y-o-Y, in line, despite SG&A cost pressures 2Q16 headline earnings were up 18% Y-o-Y and broadly in line (+3%) despite a slight operational miss on higher-than-expected SG&A costs due to other income of AED3.4mn versus other expenses of AED1.5mn (we assumed flattish other expenses) and higher finance income (quadrupled Y-o-Y). Revenue growth was strong at 17% Y-o-Y (+3% vs. EFGe), while the gross margin expanded c1.4pp. However, the EBITDA margin fell c1.6pp Y-o-Y to 17.1% (vs. EFGe of 19.1%) as SG&A costs surged 37% mainly on higher distribution (mainly Al Bayan) and marketing costs.
• Water & beverages continue to drive revenue & gross margin gains Flour & Feed revenue (c55% of 2Q16 top-line) was up only 8% Y-o-Y as weaker B2B flour sales and lower prices (soft commodity prices, competition) offset strong flour exports (KSA; Bahrain and Oman planned for 3Q16) and B2C sales (c33% of flour sales in April-May 2016 from c24% in early 2016); the gross margin fell c60bps Y-o-Y. Water & Beverages (c36%) grew 21% Y-o-Y on capacity additions, Al Bayan consolidation, further Al Ain bottled water share gains (+1.1pp since year-start to 20.6%), and spring water sales both in Turkey and UAE (exports); Capri Sun juice, however, reversed a year’s growth on lower offtake in Ramadan; the margin grew c4.3pp. Food (c9%) nearly doubled (+94%) on growth in most categories, with a strong margin recovery (+11.6pp) from a low base aided by low SMP prices.
• Potential change to flour & feed subsidies a downside risk Agthia noted that the Abu Dhabi gov’t is looking to implement some changes to the animal and feed subsidy programme (whereby it currently sells at fixed prices in AD guaranteeing its market leadership in the UAE; is compensated for the difference between its fixed and Northern Emirates prices via a subsidy). Nothing is final yet with the company still in negotiations with the government and will share details in due course. While the lack of /or a lesser subsidy would imply a higher selling price for Agthia’s flour and feed products, this could affect volumes temporarily as it would lose its edge allowing other players to push their sales efforts in AD.

Nada Amin
Hatem Alaa, CFA