Reported net profit: KWD2.2mn, -9% Y-o-Y, -55% Q-o-Q, -32% vs. EFGe
Revenue: KWD50.6mn, 1% Y-o-Y, -14% Q-o-Q, -5% vs. EFGe
Gross profit: KWD11.3mn, -11% Y-o-Y, -15% Q-o-Q, -15% vs. EFGe
Mezzan reported 2Q18 KPIs during its live webcast today with headline earnings falling c9% Y-o-Y (-32% vs. EFGe) from a low base mostly on margin pressure at its UAE operation (bulk of which is energy drink Red Bull sales) and higher financing costs due to ongoing expansions. While EBITDA was stable Y-o-Y, higher interest expenses and taxes drove the earnings decline. Effective 1 January 2018, new IFRS standards 15 and 9 for revenue and investments resulted in changes in accounting treatment of sales returns, selling and distribution expenses relating to customers and investments and trade receivables (1H17, S&D expenses of KWD2.6mn and sales returns of KWD0.2mn would have been netted off against sales had the IFRS changes been implemented then). Accordingly, a comparison to our estimates may not be entirely accurate. Excluding IFRS 9 and 15 adjustments net income, earnings would have been down 10% Y-o-Y.
The company posted a 3% Y-o-Y increase in revenue on an adjusted basis (+1% headline revenue growth) in 2Q18 (-5% vs. EFGe) as food manufacturing & distribution (-2% Y-o-Y in 1H18, c49% of revenue) continued to perform well particularly in Kuwait on newly added water capacity, while the UAE was weak. The FMCG & pharma (+8%, c26%) and catering divisions (+26%, c17%) continued to perform well (trends expected to sustain in 2H18). Services (-1%, c6%) and industrial segments (-7%, c2%) remained challenged.
Gross margin narrowed c290 bps to 22.3% (vs. EFGe of 25.0%) due to sales mix mostly. However, EBITDA for the quarter was flat -1% Y-o-Y to KWD4.0mn with EBITDA margin remaining fairly stable Y-o-Y at c7.9% as the company undertook some cost cutting initiatives particularly in the UAE where c100 employees were laid off and Mezzan exited a third party warehouse (looking for more savings on delivery and service costs).
1H18 revenue highlights by geography:
Kuwait (c73% of revenue, +11% Y-o-Y): Strong performances in water segment (on ramp up of new capacity addition – seeing double digit growth with only c50% reach in the market offering significant potential in retail outlets), catering services, and FMCG distribution.
UAE (c11%, -22%): Excise duty implementation coupled with an a countrywide market slow down continued to weigh down performance. Energy drinks market down c60% Y-o-Y (Red Bull largest player) and is key drag on growth there. Processed meat is improving (used to export to Qatar) while the installation of the new chips line in 2Q18 should help support growth.
Qatar (c10%, +6%): Sales have grown given the strong performance of catering; continues to look for strategic alternatives following the ban on water exports.
Saudi Arabia (c2%, -17%): Sales declined as KITCO products were rerouted to Qatar, trends should improve once ‘Nice’ capacity comes online in Qatar.
Jordan (c2%, -17%): Decline in sales has not impacted profitability due to low margin nature of those lost sales.
Afghanistan (c2%, +13%) and Iraq (c1%, +14%) stable performance.
Capacities additions mostly on track, delay in Qatar chips & Kuwait warehousing to 3Q18:
UAE: new chips and snacks capacities came online toward end of 2Q18
PET projects in Kuwait and Qatar also completed in 2Q18
Qatar: new chips and snacks capacities came online in 3Q18 (delay due to regulatory approval hang ups); will be ready for back to school season in September 2018
Kuwait warehouse: delay to 3Q18 on utility authority approvals.
While the result set is lacklustre, we expect the end of some headwinds (Qatar, etc.) last year and the addition of new capacity (water in Kuwait and chips in Qatar and the UAE) as well as the Saudi turnaround to support earnings growth, in 2H18 (maintained guidance of headline double digit income growth in 2018). We have a Buy rating on the stock.
Mezzan Holding: KWD0.72 as of 8 Aug. 2018, Rating: Buy, TP: KWD0.93/share, MCap: USD747mn, MEZZAN KK/MEZZ.KW