EUR 35.40 For Business Accounts Only

Recovery stalled, pushed to 2019; Maintain OW

Long-awaited expansions to bear fruit. Delayed capacity launches hindered growth in Kuwait, Qatar, and Saudi, pushing the latter’s breakeven to 2019e. We see room for recovery (pushed to 2019e vs. 2018e), as Mezzan ramps up utilisation of new and existing lines, relieving the capacity squeeze exposed post the Qatar rift, and completes efficiency projects. Implementing the selective tax in Oman should help eliminate the UAE’s energy drinks’ parallel market, easing pressures on UAE revenue (-24% y-o-y in 9M18), on lower Red Bull sales (c7% of top line). Accordingly, we cut our 12M TP by 17% to KWD0.890/share, despite rolling over our DCF and removing the proposed 10% corporate tax. Mezzan trades on a 2019e P/E of 14.6x, 7% below peers, despite its better growth outlook (2018-20e CAGR of c26% vs. peers’ c7%).

Core brands to drive growth. Launching the new chips lines in the UAE (2Q18), Qatar (3Q18), and Saudi (4Q18) should allow Mezzan to: i) garner more market share in Qatar (given the absence of Lays, with a previous market share of 70-75%), and ii) strengthen its position in Saudi, capitalising on efforts to grow Saudi’s distribution network. This, along with ramping up utilisation of Kuwait’s bottled water capacity, should drive the 7.7% p.a. pick-up in food M&D revenue over 2018-20e (48% of 9M18 top line), post the lacklustre 2017-18 growth (-c3% on average).

Efficiency measures to reap benefits in 2019. Mezzan refrained from outright price increases for chips products, but raised other products’ prices in Kuwait, post the 2x↑ in potato prices y-t-d. Manufacturing chips locally in Qatar, and PET internally, along with focusing on core brands should help unlock value from expansions, in our view. This, along with cost savings from consolidating food warehouses in Kuwait (delayed to 2019e) and the UAE (4Q17), should provide scope for EBITDA margin recovery in 2019 (+1.8ppt to 9.9%), especially as Saudi turns profitable, the UAE’s 2nd round of cost cutting pays off (4Q18), and catering profitability ramps up.

Solid demand in core market. Geopolitical and macro headwinds diverted Mezzan from its diversification target of lowering Kuwait’s exposure to 50% of sales (71% in 9M18). We see lower risk on consumption in Kuwait, as it lags GCC countries in fiscal reforms, delaying the VAT implementation to 2021. The fact that 75% of Mezzan’s sales portfolio is staple goods should help counter negative effects on consumption from unforeseen measures.