-          Net income: USD15.47mn, +28% Q-o-Q, +5% vs. EFGe

EK Holding reported its 4Q16 results, showing a solid operational performance, with earnings expanding to USD15.47mn (+28% Q-o-Q), coming broadly in line with our expectation of USD14.7mn, and culminating the year at USD62.5mn. The BoD also approved a dividend distribution of USD0.03/share, in line with our expectation and implying a pay-out ratio of c49% and a dividend yield of 4.6%.

Alexfert shines among peers on gas recovery; Natenergy faces hurdles

Alexfert stood out within EK's results as it began to recover from the weak operating environment. Alexfert beat our expectations as it enjoyed: i) full gas allocations (especially post the settling of the arbitration case with the Egyptian Government- Urea capacity utilisation stood at c101% in 4Q16); ii) higher global urea prices +16% Q-o-Q; and iii) as it supplied lower-than-expected volumes to the local market at the subsidised prices (only 4% of production). The government has also raised the prices of urea in the local market to EGP3,000/t, which we still view as a heavily subsidised price

At Sprea, the subsidiary's earnings saw a 31% Q-o-Q decline on the initial impact of the EGP's translation across its prices, but came in line with our expectation for USD5.6mn in profits. We note, however, that the company's import substitution nature has recently begun to kick in and reflect on higher prices; hence, we expect a return to USD based profitability in the coming quarters and to become, once again, one of EK's leading assets

At Natenergy, weaker operational performance was witnessed, as management took a strategic decision to bring gas installation activities to a halt, pending calls on the government to implement price revisions for the service (post the EGP floatation). While we had already witnessed a minor price adjustment in installation fees, the company remains unappeased and is calling for a considerable price adjustment. While the government is taking initiative to adjust utility prices, we think that any delays in doing so could be detrimental to players such as Natenergy

Expansions and minority clean-up on the table: EK announced in its earnings release that its BoD has given its nod of approval for the establishment of a medium-density fibreboard (MDF) facility, following the finalisation of all marketability and feasibility studies. We think this could be an accretive initiative, as it would attempt to capture market share from imports and utilise Sprea's diverse product mix of: i) wood chipboards; ii) formica sheets; and iii) glues. It is not yet clear if the new facility's organisational structure would fall under Sprea or would be established as a separate entity to capitalise on any possible tax incentives. On financing, we think EK's cash-rich balance sheet could easily accommodate such an expansion.  

The BoD also approved the cleaning up of minorities through the acquisition of 30% additional stake in Bawabat El Kuwait. It is worth noting that EK Holding already owns 41.7% in Bawabat El Kuwait, which is the main shareholder that owns Alexfert. Accordingly, this acquisition would cut down on minority interest, provide cleaner financial statements and increase the company's exposure to the fertilisers sector in Egypt. We are positive on the timing of such a deal, as gas supplies at Alexfert have been improving, while global nitrogen fertilisers prices continue to recover from their bottom in 2016. So far, the deal's value is not disclosed.  

Our view - Remain Buyers as accretive new initiatives seem to play out as a catalyst: EK Holding's share price has witnessed an impressive performance and rallied c55% since early on in November. We still think that the stock has more to offer, especially as new initiatives could prove accretive, in our view. Overall, the stock continues to trade at undemanding valuation (P/E of c9x in 2017), while also offering an attractive USD dividend yield of 4.6% on 2016 earnings and a c6% yield on 2017 earnings; hence, we reiterate our Buy rating on the stock. 

Egyptian Kuwaiti: EGP0.64 as of 1 Mar. 2017, Rating: Buy, TP: EGP0.80/share, MCap: USD656mn, EKHO EY/EKHO.CA