• Increase FV on water division performance; upside from new deals We raise our FV 5% to AED9.45, mainly as we roll over our DCF valuation and account for stronger water division growth (Al Bayan acquisition, etc.). We remain Buyers of Agthia (FV offers 26% upside) as there is strong visibility on robust mid-teen earnings growth (2016 +15% Y-o-Y, 5YR forecast CAGR of 17%) fuelled by water and distribution investments. We also like the company’s improving returns. Further upside will come from: i) recently-announced Kuwait water bottling JV (no details on investment cost, c7% proportionate contribution to capacity); and ii) further acquisitions (up to AED1.5bn earmarked) to achieve target to double 2015 top-line by 2020.
• Utilisation ramp-up; Bayan to drive top-line growth Water growth (23% 2YR revenue CAGR) will be driven by higher capacities for bottled (+40%, April 2016) and 5-gallon (more than doubled in 2015, mainly on Al Bayan acquisition) water. Agthia is now the UAE’s no. 1 bottled water company (in value and volume terms) and is no. 2 in the 5-gallon segment (jumped from no. 6 after buying Al Bayan). A price hike was rolled out in 2015, but more revisions are unlikely on sterner competition Flour sales continue to grow (+16% Y-o-Y in 1Q16) on B2B & lower trade penetration, which will likely continue as exports to Saudi Arabia via the Olayan JV ramp up with another capacity upgrade due in 2H18 (not included in our numbers on limited guidance). Feed sales (-6%), however, are challenged by competition and a decline in commodity prices that is pressuring market prices
• Commodity prices, sales mix to support margins We expect margins to continue their uptrend (improving since 2012) on favourable commodity prices (agri. business needs secured until Aug. 2016, PET to Oct. 2016) that are below 2015 levels for most inputs. (PET -12% Y-o-Y). Also, the shift in sales mix towards the higher-margin water & beverage division (c46% of 2020 revenue from c34% currently) will also bode well for margins. A downside risk is adverse changes to government subsidies on flour & feed, but we expect selling prices to adjust if this happens.

Nada Amin
Hatem Alaa, CFA