EUR 26.12 For Business Accounts Only

Widened gap to peers warrants upgrade to OW

Sell-off creates attractive entry point. We cut our TP by 12% to AED5.25/share, as we tweak our forecasts. However, we upgrade our rating to OW from N (29% upside); the sharp sell-off over the past 6M (-23% vs. +3% for ADX) widened Agthia’s valuation gap vs. peers (2019e P/E of 11.5x vs. 15.6x), creating an attractive entry point. Agthia’s story has yet to unfold, as the water and food segments performance begins to offset subsidy removal headwinds. We look for flat 2018 EPS growth vs. a 19% decline in 2017. We assume the impact from further utility price hikes and higher marketing expense will yield 40bps higher SG&A-to-sales in 2018-19e.

Saudi to add to water growth, food turnaround on track. Agthia’s growth in the UAE market is expected to remain healthy, driven by market share gains of Al Ain (28% in 2017 vs 26.9% in 2016) and Al Bayan. Operations in Saudi (c16% of water sales in 2017) should expand, on the ramp-up of capacities added in 1Q18 (+38% of water capacity). We look for 2018 GP growth of 9% for water and beverage. The food segment turnaround (8% of sales) is on track (4Q17 GPM of 20.3% vs. 13.5% in 2016), with Egypt’s bottom line in the green. We expect sustainable food margin improvement, with initiatives to breakeven the dairy business EBITDA in 2018.

Final phase of subsidy rationalisation. We expect animal feed volume to return to growth in 2018 (+2% vs. -19% in 2017), driven by new product offerings. Flour volume recovery will lag (-6% in 2018), in our view, as the final phase of subsidy rationalisation on sales to bakeries (35% of volume) will be fully lifted in Jul-18, after it was halved in Jul-17. The impact on Agthia from further unannounced subsidy removals is minimal; we estimate remaining subsidised F&F volume will stand at 15%, after the last phase of subsidy cuts, down from 78% previously.

Risks are priced in. Our TP implies a 2018 P/E of 15.3x for Agthia vs. peers’ 18.4x, assigning a discount for risks related to rising competition and residual subsidised volume. Management plans to seal an M&A in the dairy or juice sector pose upside, with our preference for dairy to help capitalise on the unutilised yogurt capacity and supported by the currently low SMP prices.