EK Holding released its 4Q18 financial highlights, showing earnings of USD21mn (-21% Q-o-Q, -53% Y-o-Y, -1.6% vs. EFGe) and full-year earnings of USD95mn. While it may seem that earnings declined, excluding 4Q17’s one-off gain in 4Q17 (USD30mn of Isquare divestment), recurring earnings would have shown a c51% spike Y-o-Y. Revenues for the quarter of USD123mn was in line with our estimates (+1.4% vs. EFGe) and saw contributions from: i) Alexfert (USD52.9mn); ii) Sprea (USD25.7mn); iii) Natenergy (USD23.3mn); iv) ONS (USD11.1mn); and vi) other minor assets contributing to the balance. EBITDA of cUSD44.1mn (ex-investment income) was marginally below EFGe but still showed a superb performance Y-o-Y with an increase of c63% (+16% Q-o-Q).  
 
Today’s main headline: EK confirms the presence of 2.3TCF of gas + 112MMbbl of condensates. While full-year results may be of importance on any particular day, today it is all about the discovery of additional hydrocarbon reserves. Based on the long anticipated seismic analysis conducted by Schlumberger, EK has finally made the announcement of the existence of 2.3TCF of gas as well as 112MMbbl of condensates. This is broken down between: 
A shallow layer (Pliocene) holding an estimated 821bcf of gas (including the c200bcf previously announced); and a deeper layer (Pre-Messinian) potentially holding another 1.5TCF + 112MMbbl of condensate. It is worth noting that ONS is already operating in the same shallow layer for its existing operational fields (TAO & Kamose) and that ONS’ concession agreement extends to 2029 with a 5 year extension option. There is still no set drilling date for the new gas and the next step would actually be to hire a petroleum consultant to assess, audit, and provide guidance on the execution and development of the fields (especially pertaining to the deeper layer). In our call, management seemed confident that: 
        the capex profile of the incremental gas finds within the Pliocene layer would be somewhat similar to its previously levels, though this is still subject to further studies and exploratory drilling; 
        the production profile would likely last for 7-8 years; and
        this field’s recovery factor is c0.7x
 
On a back-of-the-envelope estimate, every 100bcf of reserves (assuming similar capex requirements per bcf) would add USD0.1/share to out TP. With that, the economics of the deeper layer (1.5TCF +112MMbbl of condensate) remain unclear, while at this stage, there is more clarity on the shallow layer (821bcf of gas). 
 
BoD proposes a DPS of five cents/share; below EFGe: Management also announced that its BoD has proposed a DPS of US 5 cents, implying a payout ratio of only c52% and a yield of c3.9%. The proposed dividend came slightly below our DPS estimate of US 6 cents. While EK could easily pay a higher dividend, it seems management has taken a more cautious approach and kept dividends flat Y-o-Y. It is still possible that shareholders may vote to up the dividend during the AGM, the date of which has yet to be disclosed. 
 
We are Buyers of EK Holding: EK continues to prove its resilience and ability to grow both organically and through acquisitions at accretive valuations. Recently, EK Holding has been seeking growth through: i) acquiring Shield Gas Group (USD5mn ticket), which offers access to the UAE utilities space; ii) being awarded a 60MW electricity distribution rights in the Anshas area; and iii) submitting a non-binding offer to acquire Emsal Salts in Egypt, which will be subject to feasibility studies (deal size not yet disclosed). We estimate that EK Holding trades at an attractive 2019 P/E of c10x, while the growth potential are aplenty (especially after today’s announcement of additional gas finds). We reiterate our Buy rating on EK Holding.

Ahmed Hazem Maher, Alaa Saleh
 
Egyptian Kuwaiti: USD1.28 as of 27 Feb. 2019, Rating: Buy, TP: USD1.50/share, MCap: USD1,311mn, EKHO EY/EKHO.CA