Net Income: AED50.4mn, +27% Y-o-Y, +2% Q-o-Q, +10% vs. EFGe 
Revenue: AED516.7mn, +7% Y-o-Y, +8% Q-o-Q, +8% vs. EFGe
Gross Profit: AED170.8mn, +11% Y-o-Y, +2% Q-o-Q, +2% vs. EFGe
Operating Profit: AED49.3mn, +31% Y-o-Y, +1% Q-o-Q, +10% vs. EFGe
 
Agthia reported its 4Q18 results with headline earnings growing 27% Y-o-Y on revenue growth across all divisions and on resilient margins. Earnings came in 10% ahead of our forecast largely on stronger-than-expected revenue. Earnings were up 2% Y-o-Y in FY2018 to AED210.5mn; however, on a LFL basis earnings were up 11%. 
 
Revenue grew 7% Y-o-Y (+8% vs. EFGe) in 4Q18 but the company noted that LFL revenues were up 2% Y-o-Y in 2018 (excluding several non-recurring revenue items). Out of eight categories in which Agthia operates, five posted LFL growth of 3% (water, flour, tomato paste, frozen vegetables and trading items with AED1.9bn combined revenue in 2018). Segmental details below: 
 
Flour and feed (F&F) revenue (c47% of 4Q18 total) increased 11% Y-o-Y during the quarter with both flour and feed posting LFL revenue growth of 2% (total of AED0.9bn revenue combined) in 2018. Flour performance was driven by strong retail penetration especially in Northern Emirates and better pricing, while volumes were flat during the year on still-high competition from cheap flour imports. Feed revenue grew Y-o- Y in 2018 on higher volumes in municipality outlets and still-subsidized commercial farms. Also, price increases in the unsubsidized market (in line with higher commodity prices mainly wheat) supported growth. Flour and feed gross profit margin was flattish (+30bps) in 4Q18 with gross profit up 12% (segment’s net profit grew 2% Y-o-Y).
 
Water and beverages (W&B) revenue (c43%) was flattish (+1% Y-o-Y) in 4Q18. In 2018, Al Ain Water maintained its leadership in the UAE water market (28% volume market share, volume share c30% including Al Bayan and  Alpin). Total volumes were strong for both bottled and 5-gallon water (+5% and +10%, respectively, in 2018), in a market dominated by aggressive price promotions to maintain market share. The company noted that the UAE water market decline (in value terms) was the first on record. Beverages declined in line with the UAE market and on lower exports. Gross margin for the segment expanded c2.4pp to 49.2% (net profit -1% Y-o-Y) in 4Q18. 
 
The food segment (c10%) showed the strongest growth, rising 23% Y-o-Y driven by trading items from the agreement signed with the Abu Dhabi, Al Ain and Al Dhafra Region municipalities to manage retail outlets (+67% Y-o-Y in 2018). Egypt also contributed to the growth (+25% Y-o-Y in 2018) due to retail expansion and higher exports. Tomato paste and frozen vegetables grew c4% Y-o-Y. Food gross margin expanded c2.1pp to 22.7% with earnings at AED2.4mn (+268% Y-o-Y). 
 
Gross margin expanded c1.1pp to 33.1% (EFGe 35.0%) driven by better margins across all segments. Accordingly, gross profit increased 11% Y-o-Y (+2% vs. EFGe). During 2018, the company benefitted from some price increases, cost optimisation (direct overheads -2% Y-o-Y) and the extension of the flour subsidy programme for bakeries helped mitigate the effect of higher raw material prices. Meanwhile, EBITDA margin widened a similar c1.0pp Y-o-Y to 14.9% (EFGe: 14.8%) with EBITDA +15% (+9% vs. EFGe) as SG&A costs growth was limited at 4% Y-o-Y (exactly in line). 
 
The company’s BoD proposed a cash dividend of AED0.150/share for 2018 (total of AED90mn), which is higher than last year’s DPS and our estimate of AED0.125. The dividend implies a DPO of 43% and a dividend yield of 3.9%.
 
While Agthia’s operating environment remains challenging, we are positive on the results, especially on the margin front. While the removal of the flour subsidy in 2019 for bakeries will create some downward pressure on margins, we believe the company’s push to drive volumes, increase contribution of value added products and new geographies could support earnings in 2019. We have a Buy rating on Agthia. (Nada S. Amin, Hatem Alaa, CFA, Mirna Maher, company)
 
Agthia Group (AD): AED3.83 as of 27 Feb. 2019, Rating: Buy, TP: AED5.90/share, MCap: USD626mn, AGTHIA UH/AGTH.AD