Reported net profit: KWD5mn, -2% Y-o-Y, 77% Q-o-Q, -14% vs. EFGe
Revenue: KWD58.8mn, 5% Y-o-Y, 25% Q-o-Q, -6% vs. EFGe
Gross profit: KWD13.4mn, -1% Y-o-Y, 4% Q-o-Q, -19% vs. EFGe
Operating profit: KWD5.8mn, -1% Y-o-Y, 137% Q-o-Q, -10% vs. EFGe
 
Mezzan reported 1Q18 KPIs during its live webcast on Thursday with headline earnings contracting c2% Y-o-Y (-14% vs. EFGe) mostly on higher SG&A costs, interest expenses and taxes. We note that the company restated its financials to reflect IFRS 9 and 15 (changes in accounting treatment of sales returns, selling and distribution expenses relating to customers and investments and trade receivables). Excluding IFRS 9 and 15 adjustments to 1Q17 net income, earnings would have been down 6% Y-o-Y. Accordingly, a comparison to our estimates may not be entirely accurate. 
 
The company posted a 5% increase in revenue in 1Q18 (-6% vs. EFGe). Segmental performance detailed below:  
Food manufacturing & distribution (-2% Y-o-Y, c46% of 1Q18 revenue): due to a ban on water exports out of Kuwait, the implementation of excise duty on energy drinks in the UAE from 1 Oct 2017 (Mezzan distributes Red Bull in the country) and Qatar restrictions. 
FMCG & Pharma (+11%, c30%): general improvement.
Catering (+29%, c16%): grew on the back of a shift away from unstable government contracts, turnaround ongoing since 1Q17. 
Services segment (-6%, c6%): weak on temporary stoppage of all services in Afghanistan; situation has normalised since. Impact is negligible due to the low margin nature of the business. 
Industrial (-8%, c2%): no immediate plans for disposal of any investments/assets. 
 
Gross margin narrowed c140 bps to 22.7% (vs. EFGe of 26.8%) due to sales mix mostly. Meanwhile, EBITDA for the quarter inched up 2% Y-o-Y to KWD7.2mn; accordingly, EBITDA margin was flat at c12.0%. Operating profit trends were similar coming in flattish (-1% Y-o-Y) to cKWD5.8mn with the margin dipping c60bps to c9.9%. 
 
1Q18 revenue highlights by country:
Kuwait (c75% of revenue, +13% Y-o-Y): double digit growth across food and FMCG segments. 
UAE (c9%, -21%): weak on impact of excise duty on soft drinks (Oct 2017), VAT and general softness in market.
Qatar (c9%, +4%) led by catering and strong KITCO Qatar sales (+90% Y-o-Y), offset by weaker water performance on export constraints. 
Saudi Arabia (c2%, -22%): broke even in March (improving sales mix on portfolio rationalisation and new higher-margin SKUs) but sales down on rerouting of products.
Jordan (c2%, -25%): down on scrapping of low-margin tender deals but profitability unchanged Y-o-Y.
Afghanistan (2%, +6%): up on higher troops sizes and labour camp numbers.
Iraq (1%, +16%) stable Y-o-Y.
 
Others: Completed UAE warehouse and PET project in Kuwait; other projects underway proceeding as planned (chips line in UAE and Qatar and Kuwait warehouse slated for 2Q18 completion). 
 
2018e guidance maintained: High-single-digit to low-double-digit revenue growth; Double-digit net income growth 
Capex at 5% of sales (8% in 2017)
 
We are particularly positive on the fact that the company is delivering on its promises to break-even at the Saudi operation in 2018 (after pushing the date back from 2017). We expect earnings growth to continue to improve in 2018 after a challenging 2017 (Qatar headwinds, regulatory changes related to export restrictions from Qatar and VAT/excise taxes).
 
Mezzan Holding: KWD0.71 as of 9 May. 2018, Rating: Buy, TP: KWD1.18/share, MCap: USD739mn, MEZZAN KK/MEZZ.KW