EK Holding reported its 1Q16 financial results, showing earnings growing to a surprisingly high level of USD21.8mn (+45% Y-o-Y, +579% Q-o-Q, +234% vs. EFGe). The massive spike in earnings comes as the company went through a considerable round of spring cleaning, in which it offloaded a portion of its equity holding in Tri-Ocean Energy (TOE) and deconsolidated the entity as of 1 Jan. 2016. By doing so, EK managed to avoid any operational losses that would have been driven by the oil and gas segment and was a main driver behind the beat to our USD6.5mn estimate for the quarter.   So, what drove the Q-o-Q spike and beat vs. EFGe- Even if we had incorporated the full deconsolidation of the entity as of early 2016, our earnings estimates for the quarter would have still missed the reported earnings figure and come only at cUSD11mn. Full financial results are not yet released, so it is still unclear what drove the rest of the beat, which was likely a mix of one-off items, as well as some operational improvements at the remaining subsidiaries. Based on the earnings release, the operations at the three main operations (Alexfert, Sprea Misr, and Natenergy) saw substantial improvements due to the following:   Sprea Misr managed to achieve impressive earnings growth and achieved a bottom-line of USD7.2mn (+108% Q-o-Q, +45% vs. EFGe). This was driven by i) higher-than-expected price increase for the company's products, which are considered import substitutes and benefited from inability of importers from bringing volumes on FX constraints; ii) start-up of the SNF plant expansion and operating at full rates (we had assumed operating rates for SNF would come in at 60% during its ramp-up; as well as iii) urea compound volumes witnessing a spike of 38% Q-o-Q, driven by the ramp up of fertilisers plants in 1Q16 At Alexfert, earnings on a standalone basis came in at USD5.5mn ahead of our USD4mn estimate, primarily on lower-than-expected costs for the plant, which saw operating rates spike to 70% (based on rated capacity) as natural gas supplies were much higher during the quarter. Overall, given the ownership structure of Alexfert, the beat on a standalone basis should have only reflected cUSD0.5mn from the beat. As for prices, they continued to weaken in 1Q (-17% Q-o-Q), on the back of the oversupply that is plaguing the market For Natenergy, the utilities operations continue to perform well in the current market, mainly on the back of i) gas connection additions; and ii) higher electricity prices during the quarter. This led to an 11% Q-o-Q improvement in the bottom-line for the segment to reach USD5.67mn and came in line with our USD5.8mn estimate   Our view: We think that the strategic move to offload the oil and gas assets is positive for the company, given that they were affecting earnings and valuation negatively. Within our valuation for TOE, we had assumed that the Egyptian oil assets would be value-destructive for the company to the tune of USD19.4mn, while S.Sudan would only represent a positive USD1.2mn for TOE's total value. As for the North Sinai gas concession, we believe this to be the only value-accretive asset that TOE held, which EK also has a stake in directly. It still remains unclear the final ownership structure of the direct holdings that EK has in these assets (North Sinai and S. Sudan), which will be more apparent once the full financial results are released.  The stellar set of results seems to highlight management's strategic initiative to reduce risks of holding oil and gas assets. It still remains unclear the amount of capital gain, if any, that the company booked from the deconsolidation and sale of its equity holding in TOE, which could have driven the unusually high beat vs. our estimates. We will be reviewing our earnings for the company once more details are made available, but we have a positive view from our initial read into EK Holdings results and strategic initiative; hence, with the stock trading at only 5.3x PE based on an annualised 1Q2016 earnings, we remain buyers of the stock. (Earnings release, Ahmed Hazem Maher)  Egyptian Kuwaiti: USD0.45 as of 16 May 2016, Rating: Buy, FV: USD0.80 per share, MCap: USD461 million, EKHO EY / EKHO.CA