• Flattish recurring earnings, full-year guidance intact 2Q16 headline earnings fell 32% Y-o-Y as 2Q15 included one-off insurance proceeds of KWD2.2mn, if excluded earnings were flat (-1% Y-o-Y) and c7% below our estimate on a higher net finance costs and minority interest charges. Revenue grew 2% Y-o-Y (-3% vs while. EFGe). Gross margin was flattish (-20bps Y-o-Y; gross profit +1% Y-o-Y, -6% vs. EFGe) EBIT rose 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 was maintained (ex. KSA transaction): high-single 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. We remain Neutral as we believe growth prospects are reflected in the stock’s current valuation.
• Food manufacturing & distribution in Kuwait & Qatar drive top-line Food manufacturing / distribution (c56% of total) was the only segment to grow (+11% Y-o-Y) mainly due to its own brands and as 2Q16 saw the first contribution from Danone baby formula distribution. Other segments performed as follows: i) FMCG & pharmaceuticals (c21%) were flattish Y-o-Y due to lower sales of health & beauty pharma products as consumers cut discretionary spending; ii) catering (c12%) -10% Y-o-Y driven by the end of some gov’t contracts in Kuwait, while Qatar did well; segment should return to growth in 2H16 with KOC contract (high-volume) started in mid-May, KNPC to start in August and Petrofac labour camp in September – all the aforesaid contracts run for 3 years; iii) services (c7%) -19% mainly due to lower business in Iraq and Afghanistan; and iv) industrial (c3%) -11% due to lower oil prices. By country, Kuwait (c69% of 1H16 revenue) grew 5% Y-o-Y on higher food (boosted by Danone deal) and non-food sales; UAE (c15%) -6% on lower discretionary spend, which hit Red Bull sales; Qatar (c9%) +14% on strong growth in bottled water (double-digits) and catering; Jordan (c5%) +26% on new food tenders (“Services”) for the UN and WFP.
• KSA deal a potential catalyst Mezzan is set to acquire a 70% stake in Al Safi Foods (bakery & snack products) from Al Faisaliah Group. The JV will allow Mezzan to produce and distribute food products (including some of its own brands) at a cost of KWD7.0-7.7mn. The transaction is set to close in 2-4 weeks with no management guidance until it closes. We are yet to incorporate the deal in our numbers (pending more details).

Hatem Alaa, CFA
Nada Amin