2Q16 results highlights: i) recurring net profit: KWD4.8mn, -1% Y-o-Y, -11% Q-o-Q, -7% vs. EFGe; ii) revenue: KWD52.8mn, 2% Y-o-Y, -5% Q-o-Q, -3% vs. EFGe; and iii) operating profit: KWD5.6mn, +11% Y-o-Y, -7% Q-o-Q, 0% vs. EFGe.  Mezzan reported 2Q16 headline figures yesterday with net income of KWD4.8mn, down 32% Y-o-Y as 2Q15 included one-off insurance proceeds of KWD2.2mn, excluding which earnings were flattish (-1% Y-o-Y) and slightly below our estimate (-7%) on a combination of higher net finance costs and minority interest charges.   Revenue grew 2% Y-o-Y (-3% versus EFGe) with food manufacturing and distribution (c56% of total) the only segment posting growth (+11% Y-o-Y) mainly driven by Mezzan’s own brands rather than partner brands and as the quarter saw first contribution from the distribution of Danone baby formula. Other segments performed as follows: - FMCG & pharmaceuticals (c21%) were flattish Y-o-Y due to lower sales of health & beauty pharma products as consumers cut down on discretionary spending. - Catering (c12%) -10% Y-o-Y driven by the end of some government contracts in Kuwait while Qatar performed strongly; segment should return to growth in 2H16 with KOC contract (high-volume) started in mid-May, KNPC to start in August and Petrofac labor camp in September   – all the aforementioned contracts run for three years. Catering margins should remain flattish Y-o-Y. - Services (c7%) -19% mainly due to lower business in Iraq and Afghanistan. - Industrial (c3%) -11% due to lower oil prices.   Gross margin was flattish (-20bps Y-o-Y; gross profit +1% Y-o-Y, -6% vs. EFGe) while EBIT advanced 11% Y-o-Y and the margin was up c80bps Y-o-Y as SG&A costs fell 4% Y-o-Y (-9% versus EFGe).  Guidance maintained (ex. KSA transaction discussed below) of high-single-digit to low-double-digit revenue and earnings growth (ex. one-offs) – which implies a stronger 2H16 on better catering & service (the latter on some Jordan contracts) revenue and contribution from the Danone business; capex-to-sales of 5% (from 3% in 1H16 due to spending on Kuwait water line and UAE warehouse).   Update on KSA transaction: - To acquire 70% stake in Al Safi Foods from Al Faisaliah Group (will keep the remaining 30% stake). - JV will allow Mezzan to produce and distribute food products (including exclusive rights to all of Mezzan’s existing brands in KSA) while gaining exclusive rights for the acquired company’s current bakery and snack products. - The existing unit has a fleet of 40 bakery trucks - Cost is KWD7.0-7.7mn - Transaction to close in 2-4 weeks. - It will take about a year for the operation to be where they want it to be. - No further guidance until transaction closes.   1H16 revenue highlights by country: - Kuwait (c69% of 1H16 revenue) +5% Y-o-Y on higher food (boosted by Danone deal) and non-food sales; growth was double-digits excluding catering revenue, which fell Y-o-Y. - UAE (c15%) down 6% on lower discretionary spend affecting Red Bull sales (for which the decline is roughly c12% Y-o-Y with support coming from sales of Mezzan's own brands). - Qatar (c9%) +14% on strong growth in both bottled water (double-digits) and catering. - Jordan (c5%) +26% on new food tenders (“Services” segment) for the UN and WFP.   Overall a results set with no major surprises. We remain Neutral as we believe its growth prospects are reflected in the current valuation with the main catalyst being guidance on the Saudi deal when it closes (not included in our forecasts). (Hatem Alaa, CFA, Nada Amin)   Mezzan Holding: KWD1.06 as of 7 August, Rating: Neutral, FV: KWD1.18/share, MCap: USD1,100mn, MEZZAN KK / MEZZ.KW