EUR 22.11 For Business Accounts Only

MEZZAN KK | Bound for recovery from low base, despite headwinds; Remain Overweight

Slowly turning a corner. We remain buyers, as the earnings recovery story continues to unfold (2019 clean EPS +c24% y-o-y), albeit at a slower pace, pressured by Saudi’s ongoing distribution network expansions and, to a lesser extent, Qatar’s unresolved bottled water overcapacity. We cut our 12M TP by 21% to KWD0.700/share, to reflect a slower pace of EPS recovery (24% cut in our 2020-23e forecasts), as we deem the reversal of profitability drags unlikely in the short-term, hindered by the unfavourable GCC dynamics. Mezzan trades on a 2020e P/E of 14.2x (falling to c13x in 2021e), while our valuation implies 2020e P/E of 18.0x vs. peers’ average of 20.5x.

COVID-19 impact mixed bag. We see Mezzan as a net beneficiary of the short-term consumption spike amid COVID-19, supported by its leading position (c20% shelf space in Kuwait’s co-ops), growing food revenue by 4.4% y-o-y in 2020e (c70% of top line). This should more than offset sales weakness in discretionary items and other channels (food services in the UAE), and on temporary sporadic disruptions, amid the lockdowns. The positive impact should be more pronounced on the FMCG segment (+21%, +12% ex-KSPICO), in our view, on higher household goods sales and KSPICO*’s consolidation (c5% of sales), making the segment a key driver for 2020e.

Adverse GCC dynamics hinder growth, diversification. We account for slower consumption patterns in Kuwait, as pressures on the government to move forward with austerity measures appear to be rising (likely to be announced end-2020, post Parliamentary elections). Meanwhile, we see limited impact from a potential expat exodus, as Mezzan is more dependent on nationals, who spend 2.7x more than expats on F&B. However, Kuwait should remain Mezzan’s key market (c70% of top line), especially with the lagging demand expected in Saudi and the UAE, along with the continued ban of bottled water exports in Qatar (was lifted in Saudi in Jul-20).

On track for operational recovery. Despite the subdued revenue growth over 2019-21e of 3.6% p.a. (+8.5% in 2020e, -c1% in 2021e), this should translate into a robust EPS CAGR of c51% p.a. (c30% on a clean basis), supported by sustained EBITDA margin recovery on better sales mix (10.9% in 2021e vs. 9.1% in 2019), along with gradual deleveraging (ND-to-EBITDA of 2.2x vs. 3.7x in 2019). This, along with limited capex (c3% of sales) and better working capital management, should fuel the robust recovery in FCFF (c5x by 2021e), despite KSPICO’s higher working capital needs.