Jun-15 Jul-15 Aug-15 Sep-15 Global Research Investment Update Equity Kuwait Food Sector 20 September, 2015 Mezzan Holding Company KSCC (Mezzan) Market Data Bloomberg Code: MEZZAN KK Reuters Code: MEZZ.KW CMP (20 Sept 2015): 1.040 O/S (mn) 296.5 Market Cap (KWD mn): 308.4 Market Cap (USD mn): 1,021.6 P/E 2015e (x): 14.3 P/BV 2015e (x): 3.1 Price Performance Since Listing High (KWD): 1.220 Low (KWD): 0.740 Average Volume ( 000): 807 1m 3m 12m Absolute (%) -3.8-1.9 NA Relative (%) 4.7 6.6 NA Price Volume Performance 20,000 15,000 10,000 5,000 1,250 1,150 1,050 950 850 750 2Q15 earning surpasses our estimate by huge margin Bottom-line to remain strong on higher organic growth Lower operating costs to boost margins Current valuation suggests BUY BUY Target Price KWD1.152 We have raised our FV for Mezzan Holding to KWD1.152 from KWD0.960 previously which offers a decent upside of 10.8% from its current level. Albeit, our recommendation is lowered from STRONG BUY to BUY on account of a sizeable jump in its price since our last report, we remain bullish on the stock due to the company s initiation of a new bottling line in Qatar, introduction of new brands in partnership with KITCO, inauguration of a new refinery with KLOC, construction of warehouse on KSA, increasing of catering business capacity and the launch of new retail customer stores in Erbil and Dohuk (Iraq). We are optimistic regarding the company s outlook as it is actively looking to expand its footprint through the acquisition of small food companies across GCC. A drop in provisions against inventory and receivables is forecast to reduce operating cost as the company continues to invest in IT infrastructure. The firm's bottom line is estimated to expand at a CAGR of 16.2% during 2014 18e, with ROAE of 23.1% in 2015e. As Mezzan operates in the defensive sector, with leading brands under its umbrella, we expect its credentials to prove fruitful for investments. The stock is currently trading at a P/E of 14.3x, compared with the industry average of 19.5x. The company's vast future potential justifies its valuation. We are optimistic about the stock and anticipate the stock price to reach KWD1.152 within 12 18 months, which is 10.8% higher than the company's current market price of KWD1.040 as on 20 September 2015. 0 Volume ('000) Source: Bloomberg Naveed Ahmed, CFA Senior Manager nahmed@global.com.kw Tel.: (965) 22951280 Global Investment House www.globalinv.net 650 Mezzan (fils) Valuation update recommend BUY We have revised our fair value for Mezzan by 20% to KWD1.152/share, 10.8% higher from the company s current market price of KWD1.040/share as on 20 September 2015. We believe the firm s sales would witness stable growth during our forecast period, with a captive market base added by expansion plans coming online. The management expects something between high single digits to low teens in terms of revenue growth. Furthermore, the company has already successfully managed to reduce some segments of its operating cost which would boost profitability. We expect the firm s gross profit to reach KWD72.6mn by 2018e rising at a CAGR of 12.2% from 2014-2018e. Furthermore, we expect operating profit to grow at a CAGR of 15.5% during the same period. We have employed a combination of the DCF methodology and comparative multiples namely P/E, deriving 80% of the value from the former and the remaining from the latter. We have taken a terminal growth rate of 3.0% and WACC of 8.0% for DCF. Estimates of 2015e revised upward We have revised our estimates for some of the line items from the income statement after the release of the company s 2Q15 results. We expect that the company s sales would be on similar lines to our previous estimate; however, looking at the YoY growth in cost of sales in 2Q15, we have increased our cost of sales forecast by 1.9%, which has led to a 3.0% reduction in our gross profit forecast. As we believe company s SG&A expenses to decline going forward, we have lowered down our SG&A expenses forecast by 6.3%, which has led to a rise in operating profit forecast by 3.1%. We do not expect the repetition of one-offs in the second half, though a sizeable addition in forex income may be witnessed.
Global Research Kuwait Estimates Revision - 2015e KWD 000 Earlier Estimates Revised Estimates % Change Sales Revenue 207,644 208,900 0.6% Cost of Sales 152,046 154,967 1.9% Gross Profit 55,598 53,934-3.0% SG&A 36,002 33,739-6.3% Operating Profit 19,597 20,195 3.1% Net Profit 20,318 21,510 5.9% Source: Global Research 2Q15 earning beats our estimate Mezzan reported a robust 82%YoY growth in its net profit in 2Q15 due to 15%YoY rise in sales revenue and a huge jump in the firm s other income on account of an insurance settlement claim of KWD3.3mn in 2Q15 of a fire accident of one of its factories in 2013, less a PPE impairment of around KWD1mn. Excluding this one off gain, net profit increased 21%YoY. Results surpassed our estimate by 23% due to a deviation in our other income projection. The company s food business-line revenue grew 18%YoY in 2Q15 to KWD38.9mn, while, non-food revenue grew 7%YoY to KWD12.7mn. Amongst individual segments, manufacturing and distribution revenue grew 13%YoY, catering revenue rose 6%YoY and services revenue grew 112%YoY in 2Q15. Amongst non-food, FMCG and pharmaceuticals revenue rose 10%YoY and Industrials revenue rose 8%YoY in 2Q15. The company s gross profit increased 11%YoY during 2Q15, while operating income rose 10%YoY. The company s G&A expenses reduced 4%YoY, while the selling and distribution expenses rose 25%YoY. Major revenue segment (%) in 1H15 Revenue sub-segment (%) in 1H15 Industrials, 3.2% Non-Food Business, 24.5% FMCG, 21.3% Food Business, 75.4% Services, 9.4% Catering, 13.9% Manufacturi ng and Distribution, 52.1% Source: Company filings, Global Research On QoQ basis, the company s net profit to equity holders increased 29% due to higher other income. Sales revenue declined 2%QoQ, while gross profit was flat on QoQ basis. Operating profit declined 6%QoQ due to 8%QoQ rise in selling and distribution expenses. In 1H15, net profit increased 66%YoY, sales revenue rose 13%YoY, while gross profit increased 12%QoQ. The company s sales revenue was lower than our estimate; gross profit was also lower than our projection, since we had not assumed the insurance claim settlement during the quarter. The increase in other income is one-off in nature; if we remove this line item, the net profit comes lower than our estimate. September - 2015 2
Global Research Kuwait Income Statement (KWD mn) 2Q15e 2Q15A Variance 2Q14 YoY% 1Q15 QoQ% Sales Revenue 54.5 51.6-5% 44.8 15% 52.9-2% Cost of Sales (39.9) (38.2) -4% (32.8) 16% (39.4) -3% Gross Profit 14.6 13.4-8% 12.0 11% 13.4 0% General & Administrative Expenses (4.0) (3.1) -24% (3.2) -4% (3.2) -3% Selling & Distribution Expenses (5.1) (5.3) 5% (4.2) 25% (4.9) 8% Operating Profit 5.5 5.1-8% 4.6 10% 5.4-6% Other Income 0.4 2.4 524% (0.1) NA 0.3 861% Profit Before Tax 5.9 7.5 27% 4.5 68% 5.6 33% Tax (0.1) (0.2) 82% (0.1) 166% (0.1) 70% Net Profit 5.8 7.3 26% 4.4 67% 5.5 32% Minority Interest (0.1) (0.3) 231% (0.5) -50% (0.1) 292% Net Profit to shareholders 5.7 7.0 23% 3.9 82% 5.5 29% Source: Company Accounts September - 2015 3
Ratio Analysis Cash Flow Balance Sheet Income Statement Global Research Kuwait Financial Statements (KWD 000) 2012 2013 2014 2015e 2016e 2017e 2018e Revenue 139,394 142,377 182,504 208,900 231,178 254,101 279,790 Cost of sales (106,892) (111,187) (136,617) (154,967) (171,353) (188,242) (207,160) Gross Profit 32,502 31,189 45,886 53,934 59,825 65,859 72,630 SG&A (22,536) (23,688) (29,928) (33,739) (37,213) (40,304) (44,278) Operating Profit 9,965 7,502 15,958 20,195 22,613 25,555 28,352 Financial charges (1,386) (1,067) (1,059) (991) (1,064) (1,073) (1,084) Other income 3,073 6,872 1,473 3,766 1,215 1,268 1,433 Profit Before Taxation 11,653 13,307 16,372 22,970 22,764 25,750 28,700 Taxes & BOD Remuneration (494) (238) (308) (611) (605) (682) (757) Zakat & Minority Interest (2,228) (2,635) (1,312) (850) (842) (953) (1,062) Net Profit 8,931 10,434 14,753 21,510 21,316 24,116 26,882 Cash and Bank Balance 3,649 14,951 5,168 15,505 23,894 31,896 38,466 Receivables and Prepayments 42,250 44,329 46,351 51,510 57,003 64,047 70,522 Inventories 31,184 31,332 33,275 37,717 40,031 42,907 46,043 Other Current assets 1,192 943 55 55 55 55 55 Total Current Assets 78,275 91,555 84,850 104,787 120,983 138,906 155,087 Investments 8,567 3,274 1,747 1,811 1,879 1,949 2,022 Intangible Assets 2,073 2,205 11,880 11,623 11,372 11,126 10,886 Net Fixed Assets 50,945 57,633 65,348 69,659 71,621 75,072 78,730 Total Fixed Assets 61,584 63,113 78,975 83,093 84,871 88,147 91,638 Total Assets 139,858 154,668 163,825 187,880 205,855 227,053 246,725 Accounts payables 21,643 22,731 33,712 38,212 42,219 46,356 48,921 Short-term loan 20,256 23,676 24,588 31,344 31,344 31,344 31,344 Other current liabilities 16,211 11,558 5,916 4,899 5,165 5,570 6,063 Long-term debt 1,715 11,133 6,362 5,970 5,970 5,970 5,970 Employee end-of-service benefits 5,857 3,337 4,588 4,987 5,425 5,908 6,439 Share capital 19,800 19,800 29,650 29,650 29,650 29,650 29,650 Retained Earnings 28,426 31,327 34,179 42,395 50,263 60,334 69,616 Other reserves 17,600 19,620 22,689 27,433 31,986 37,136 42,876 Total Shareholders Equity 65,826 70,747 86,518 99,478 111,899 127,120 142,142 Minority Interest 8,350 11,485 2,141 2,990 3,832 4,785 5,847 Total Equity & Liability 139,858 154,668 163,825 187,880 205,855 227,053 246,725 Cash Flow from Operating Activities 13,477 9,497 27,524 23,534 24,268 25,530 27,396 Cash Flow from Investing Activities (8,286) (13,503) (8,444) (9,003) (6,185) (7,966) (8,374) Cash Flow from Financing Activities (6,757) 6,619 (14,075) (4,344) (9,693) (9,563) (12,451) Change in Cash (1,916) 2,708 5,023 10,337 8,390 8,001 6,570 Net Cash at End (7,055) (4,347) 675 15,505 23,894 31,896 38,466 Gross Margin 23.3% 21.9% 25.1% 25.8% 25.9% 25.9% 26.0% Operating Margin 7.1% 5.3% 8.7% 9.7% 9.8% 10.1% 10.1% Net Margin 6.4% 7.3% 8.1% 10.3% 9.2% 9.5% 9.6% Return on Average Assets 6.7% 7.1% 9.3% 12.2% 10.8% 11.1% 11.3% Return on Average Equity 14.0% 15.3% 18.8% 23.1% 20.2% 20.2% 20.0% Quick Ratio (x) 0.8 1.0 0.8 0.9 1.0 1.2 1.3 Debt / Equity (x) 0.5 0.6 0.4 0.4 0.4 0.3 0.3 Adj. EPS (KWD) 0.030 0.035 0.050 0.073 0.072 0.081 0.091 Adj. Book Value Per Share (KWD) 0.222 0.239 0.292 0.336 0.377 0.429 0.479 Market Price (KWD) * - - - 1.040 1.040 1.040 1.040 Market Capitalization (KWD 000) - - - 308,360 308,360 308,360 308,360 Dividend Yield 0.0% 0.0% 0.0% 2.9% 2.9% 3.8% 3.8% P/E Ratio (x) - - - 14.3 14.5 12.8 11.5 P/BV Ratio (x) - - - 3.1 2.8 2.4 2.2 Source: Company Reports & Global Research * Market price for 2015 and subsequent years as per closing prices on 20 September, 2015 September - 2015 3
Global Research Kuwait Disclosure The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Bloomberg Reuters Company Recommendation Ticker Ticker Price Disclosure Mezzan Holding BUY MEZZAN KK MEZZ.KW KWD1.040 1,10 1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year, Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition STRONG BUY BUY HOLD SELL Fair value of the stock is >20% from the current market price Fair value of the stock is between +10% and +20% from the current market price Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is < -10% from the current market price Disclaimer This material was produced by Global Investment House KSCC ( Global ), a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities ( securities ), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgment. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice. Past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations. September - 2015 4
Global Investment House Website: www.globalinv.net Global Tower Sharq, Al-Shuhada Str. Tel. + (965) 2 295 1000 Fax. + (965) 2 295 1005 P.O. Box: 28807 Safat, 13149 Kuwait Research Naveed Ahmed, CFA (965) 2295-1280 nahmed@global.com.kw Wealth Management Rasha Al-Qenaei (965) 2295-1380 alqenaei@global.com.kw Global Kuwait Tel: (965) 2 295 1000 Fax: (965) 2 295 1005 P.O.Box 28807 Safat, 13149 Kuwait Global Egypt Tel: (202) 24189705/06 Fax: (202) 22905972 24 Cleopatra St., Heliopolis, Cairo Global Bahrain Tel: (973) 17 210011 Fax: (973) 17 210222 P.O.Box 855 Manama, Bahrain Global Saudi Arabia Tel: (966) 1 2994100 Fax: (966) 1 2994199 P.O. Box 66930 Riyadh 11586, Kingdom of Saudi Arabia Global UAE Tel: (971) 4 4477066 Fax: (971) 4 4477067 P.O.Box 121227 Dubai, UAE Global Jordan Tel: (962) 6 5005060 Fax: (962) 6 5005066 P.O.Box 3268 Amman 11180, Jordan Global Wealth Manager E-mail: contactus@global.com.kw Tel: (965) 1-804-242