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Kuwait Food Co. - Americana

Source: CI Capital

Strong segmental performance-Upgraded to BUY

Kuwait Food Co. [FOOD] exhibited a 110% year-on-year increase in its 9M10 earnings to KWD35.2mn (7% below CICRe of KWD37.9mn). We believe deviation from estimates resulted mainly from the recognition of other operating expenses, especially provisions. Earnings growth came on the back of an 11% growth in revenues, thanks to a double digit growth in turnover of the restaurants and the industries segments. In this note, we finetuned our top line estimates for FOOD over the forecast period, while cut our earnings estimates by an average of 7%. This mainly came after revising our EBITDA margin forecasts lower on higher-than-expected food prices. Partially offset by the lower risk-free rate utilized, and lower outstanding net debt, we cut our LTFV by 1% to KWD1.81/share. FOOD is trading at a 2011E PER of 13.5x, a discount to market 2011E PER of 15x. Share price increased almost 12% from our IoC report dated June 21, 2010. In this note, we prefer to set our target price as our LTFV of KWD1.81/share. The stock currently bears a c.18% upside potential, and though this technically necessitates a Hold rating as per our recommendation matrix, we have opted to upgrade it Buy in view of the technical stability of the Kuwait market and the relatively lower comparative valuation of the stock vs. market average.

Valuation and recommendation: We remain confident in the company’s operating performance owing to sustained demand and economic recovery. Yet, high food prices continue to concern us. As such we revised our margins lower in anticipation of higher food prices. This was partially offset by lower risk- free rate utilized, and lower outstanding net debt, therefore, we cut our LTFV by 1% to KWD1.81/share. FOOD could cash in almost KWD90.3mn in case Al-Kharafi sold its stake in Zain to Etisalat at KWD1.7/share. With our target price set as our LTFV, we upgraded our recommendation to Buy up from Hold.

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