Reported net loss KWD0.4mn, vs. net profit of KWD2.8mn in 4Q17 and KWD1.2mn in 3Q18, KWD1.3mn EFGe
Revenue: KWD46mn, -2% Y-o-Y, -12% Q-o-Q, -3% vs. EFGe
Gross profit: KWD8.9mn, -31% Y-o-Y, -15% Q-o-Q, -14% vs. EFGe
Operating profit: KWD0.1mn, -96% Y-o-Y, -94% Q-o-Q, -91% vs. EFGe
 
Mezzan reported a disappointing set of 4Q18 KPIs during its live webcast on Thursday with the company posting a net loss of KWD0.4mn vs. a net profit of KWD2.8mn in 4Q17 , which fell short of our KWD1.3mn net profit estimate for the quarter. The key headwinds the company has echoed for much of 2018 remained at play, including margin pressure at its UAE operation (bulk of which is energy drink Red Bull sales) and input cost pressures. Also, figures were affected by IFRS 9 and 15 adjustments (effective 1 January 2018) for revenue and investments (in 2017, S&D expenses of KWD4.3mn & sales returns of KWD0.2mn would have been netted off against sales had the IFRS changes been implemented then; 2018 reported numbers include these changes worth KWD5.6mn and KWD0.2mn, respectively). Accordingly, a comparison to our estimates may not be entirely accurate. In FY18, earnings dropped c41% Y-o-Y to KWD7.7mn (-39% pro forma).  
 
The company posted flat revenue (on a pro-forma basis; -2% Y-o-Y on headline figures) and was broadly in line with our forecast (-3% vs. EFGe). In FY18, the company’s revenue grew c4% on a pro-forma basis (headline +1.4%) as food manufacturing & distribution (c49% of revenue) fell 4% Y-o-Y mostly weighed down by a still-weak UAE market, as well as a slow ramp-up of Qatar and Saudi capacities, in our view. FMCG & pharma (c23%) grew 5%, while catering (c18%) rose 29%. The volatile services segment (c8%) saw revenue increase of 8% while the industrial segment (c3%) remained challenged (-4%). 
 
Gross margin narrowed c8pp to 19.4% (-6.6pp on a pro-forma basis) coming in at 19.4%, falling short of our 21.8% forecast and hitting an all-time low. EBITDA was down a more drastic 63% Y-o-Y (-29% vs. EFGe) as SG&A costs were up 3% Y-o-Y (on a pro-forma basis). 
 
2019 guidance
-       Revenue: high-single-digit growth mostly on ramp up in capacity. 
-       EBITDA and net income: high-double-digit growth.  
-       Capex 5% of sales: completed large capex programme that began in 2017 (which should help improve FCF generation); expect normal rate of investment going forward.
 
The company’s BOD has recommended a cash dividend distribution of 16 fils per share for 2018 implying a payout ratio of 65% (falling short of our KWD0.018 forecast) and a yield of 3.3%; leverage rose 30% Y-o-Y to cKWD46mn mostly to finance capex. Regarding the financing for the share buyback programme the company noted that CF generation should improve as capex spending eases.  
 
Mezzan expects the food manufacturing and distribution to be the main growth engine for the business going forward. While we expect some recovery in 2019 earnings on a low base effect and as volumes/margins begin to pick up (the company is guiding for high-double-digit earnings growth), we expect share price to likely remain under pressure until the company begins to deliver on its earnings growth promises.

Nada Amin, Hatem Alaa
 
Mezzan Holding: KWD0.49 as of 20 Mar. 2019, Rating: Buy, TP: KWD0.56/share, MCap: USD505mn, MEZZAN KK/MEZZ.KW