• Geographic diversification continues with buyout of KSA snack start-up Mezzan Holding announced today that it had effectively acquired a 70% stake in KSA-based start-up snack business Al Safi Food Co. (will be later renamed Mezzan Food Co.) via a SAR90.75mn capital injection (KWD7.3mn) with founders Al Faisaliah Group (a KSA conglomerate with interests in several businesses including dairy company Al Safi Danone) retaining the remaining 30%. The transaction grants Mezzan presence in KSA, a key target market, where it only has minimal exports, allowing it to produce, market and distribute all of Mezzan’s own snack brands, while retaining exclusive rights to Al Safi Foods’ existing product portfolio (seven products, mostly baked snacks like packaged croissants). Al Safi Foods was established by Al Faisaliah Group in January 2014 and only started operations in May 2015.
• Detailing Mezzan’s turnaround plan Immediate: Managing opex, headcount, SKU rationalisation; increase plant utilisation from c40% to c80%; sell snack products produced in Kuwait (such as biscuits) and the UAE (chips) in Saudi Arabia 6-12 months: Build scale, add distributors (currently has daily access to 2.4k stores) and invest in brands to drive growth 12-18 months: Deploy a portion of the capital increase (cKWD5mn) to increase capacity via new product lines and building factories to serve KSA and Kuwait, leveraging on 70k sqm of unutilised leased land in Al-Kharj 18-24 months: Having profitable, efficient operation serving Saudi Arabia
• Initial impact small, but could be 5-10% of revenue in two years’ time We are positive on the deal as it is another milestone in Mezzan’s geographic diversification strategy (Kuwait was 66% of revenue in 2015, down from 85% in 2013, aided by expansions in the UAE and Qatar). However, we believe the initial impact of the transaction will be small (operation generates SAR1mn/month) until Mezzan implements its turnaround plan. Also, the deal will likely be earnings-dilutive in the short term, as the company is loss-making, given its start-up status (will breakeven in 4Q17; cKWD3mn in expected losses over 2016-17e, as KWD2.5mn are injected to cover working capital funding and a KWD0.5mn one-time transaction cost is incurred). Operation could be sizeable in the medium- to long-run, with management targeting 5-10% top-line contribution from Saudi Arabia by 2018e. We maintain our Neutral rating and fair value for now, given the likely small near-term impact on numbers, and as we get further guidance from management, as the turnaround plan is implemented, especially given strong competition in the Saudi Arabian snack market and signs of slowing structural demand food growth.

Hatem Alaa, CFA
Nada Amin