Following the announcement of its financial results for the first nine months of 2014 and for the third quarter of 2014, Agthia Group received a complete evaluation of its performance by EFG Hermes.

Operationally the third quarter was solid but mostly in line, EFG said, reiterating its recommendation “Buy” for the stock. Agthia Group earnings surged to AED 46.3 million in Q3-14, up 38% Y-o-Y (-17% Q-o-Q) and eight percent ahead of EFG’s estimate. Earnings growth was mainly driven by feed gains, in addition to better performance from water and beverages on new capacity, the report highlighted, noting that on the operational level, results were broadly within their estimate (EBITDA +20% Y-o-Y, -4% versus forecast) with the earnings beat driven by higher Other Income.

“We remain Buyers of Agthia as we expect strong earnings growth to sustain on capacity additions, both recently commissioned (doubling of UAE bottled water capacity) and upcoming (feed in Q1-15; Turkey water doubling in Q2-15), along with the take-off of new ventures (frozen baked goods). Margins also offer room for surprises,” EFG said in its report.

Meanwhile, Flour & Feed (F&F) revenue (c61% of total) grew 11% Y-o-Y, driven by 17% volume growth in animal feed (flour volume fell eight percent) on strong market growth and rebranding to “Agrivita” in Q1-14, EFG noted, adding that F&F margins expanded only c50bps Y-o-Y to 22.6% (gross profit +13% Y-o-Y), weighed down by lower-margin grain trading activity and sales mix, owing to more feed sales.

“Management expects margins to improve in 2015 on strategically procured grains (through Q1-15) and as volume growth accelerates on flour utilisation ramp up (capacity +19% in Q1-14) and higher feed capacity in Q1-15 (+11%, capacity originally scheduled for Q4-14). However, Northern emirates’ flour prices may decline as a delayed response to the drop in global grain prices,” the financial agency added in its report.

Water and beverage (W&B) revenue rose by 12% as production bottlenecks were removed following the capacity upgrade (2x in June 2014). Accordingly, W&B margins narrowed c60bps but should rise owing to efficiency of the new capacity increases to c85% in Q4-14 from c60% currently; added to doubling capacity in Alpin, Turkey Q2-15. It is worth noting that the GCC launch was delayed due to strong Turkish offtake. Furthermore, a new water bottled design reduces PET needs by c15%; and PET costs fall on lower oil prices.

Agthia is also still negotiating a water price increase with the relevant authorities, EFG Hermes’ report concluded.