• Solid Kuwait consumer play; Neutral as valuation captures growth We initiate coverage on Mezzan Holding, a leading FMCG in Kuwait (65%+ of revenue; operates in six other countries), with a FV of KWD1.18/share (11% upside) and a Neutral rating as we believe current valuation (c18x 2016e P/E, in line with regional peers) adequately reflects its growth prospects (2016-17e EPS CAGR: 12%). Mezzan operates in five segments, the largest of which are food manufacturing & distribution (c51% of 2015 revenue) and FMCGs & pharmaceutical distribution (c23%) that include: i) production of snacks (mainly potato chips in Kuwait and the UAE) and bottled water (in Qatar and Kuwait); and ii) distribution of energy drink Red Bull in the UAE and household products in Kuwait under agencies from Reckitt Benckiser, Kimberly Clark and Johnson & Johnson.
• Strategy is to focus on food manufacturing Mezzan is focused on growing its food manufacturing platform via capacity expansions of its own brands – will quadruple bottled water and double potato chips capacities in Kuwait in 2017e and is ramping up capacities added in 2015 (bottled water in Qatar and snacks in the UAE). This strategy should bode well for margins (c50% gross margin vs. c20% for agency brands). Also, the company is consolidating its operations in Kuwait (single food warehouse, back office functions, etc.) that could also improve working capital management and margins.
• Volatility from contract businesses, disclosure levels among key risks Mezzan’s two largest segments encompass over 350 brands (250k+ SKUs) of varied products, but disclosure levels are limited, making analysis tough. Also, catering services to government entities and corporates (c14% of 2015 revenue) and in challenging locales (c8%; army bases, etc.; highest margin segment) are contract-based and cause some earnings volatility.
• What would make us more positive? i) A value-accretive acquisition with KSA a key target market (track record is solid, with UAE’s Red Bull distributor acquired in 2014 at low-single-digit multiples and helped improve distribution of other products in the UAE); ii) further SKU rationalisation (given their large number); iii) food capacity addition plans; and iv) divestment of the non-core industrial segment (c3% of revenue, loss-making).

Nada Amin
Hatem Alaa, CFA