18-May-2017
EK Holding - Raise TP on clearer outlook; growth knocking at the door
Rating: Buy
Target Price: USD0.850
Closing Price: USD0.640
Raise TP to USD0.85; reiterate Buy on appealing investment case
We raise our TP by c6% to USD0.85 primarily as we reduce Alexfert’s discount rate post the settlement of the arbitration. We also bring our valuation for Natenergy down c9% as there seems to be a slowdown in the implementation of higher gas connection fees. EK Holding continues, in our view, to present a solid investment case as it enjoys: i) a liquid balance sheet, which is flush with cash at the holding level and at subsidiaries; ii) c16% EPS CAGR through to 2020e; and iii) a lucrative dividend yield of c6% in 2017e and c8% in 2018e. EK Holding trades at undemanding multiples only 8.6x 2017e P/E and 1.4x P/B (while offering an average ROAE of c19% till 2020e). We also see catalysts materialising in the form of minority buyouts and further expansion opportunities, which we do not account for in our numbers. Hence, we reiterate our Buy rating on EK Holding.
Streamlining the business model; divestments and acquisitions are in the pipeline
Building upon the company’s strategy from 2016 to streamline its operations, which saw incremental equity stakes being bought in Natgas and the deconsolidation of Tri-ocean, EK Holding is currently bidding to acquire an additional stake in Alexfert (through acquiring up to 30% in Bawabat Al Kuwait – the major shareholder in Alexfert). EK Holding is also in the market to sell off its stake in both Egyptian Hydrocarbon Company (EHC- 4% of our TP) and Building Materials Industries Company (BMIC – 3% of our TP), in an attempt to focus on core operations. We do not yet account for either of the company’s proposed divestments or even its planned acquisition as pricing and the final outcome remains unknown. However, we believe there is an opportunity of value creation for shareholders from streamlining operations.
Keep an eye out for growth prospects; MDF project is key catalyst
While we do not account for its proposed Medium Density Fiberboard (MDF) project, we think that it will likely capture an under-served market that is otherwise catered for by imports. We believe EK Holding has a solid chance to capitalise on the growing MDF market in Egypt, while also integrating with Sprea’s complementary products such as resins and glues. Currently, management expects the project will have an investment cost of cEGP2bn (cUSD110mn), while generating an EBITDA margin of c40-45%. We estimate the project could potentially offer an IRR north of 25% (based on rough estimates).
Ahmed Hazem Maher
Target Price: USD0.850
Closing Price: USD0.640
Raise TP to USD0.85; reiterate Buy on appealing investment case
We raise our TP by c6% to USD0.85 primarily as we reduce Alexfert’s discount rate post the settlement of the arbitration. We also bring our valuation for Natenergy down c9% as there seems to be a slowdown in the implementation of higher gas connection fees. EK Holding continues, in our view, to present a solid investment case as it enjoys: i) a liquid balance sheet, which is flush with cash at the holding level and at subsidiaries; ii) c16% EPS CAGR through to 2020e; and iii) a lucrative dividend yield of c6% in 2017e and c8% in 2018e. EK Holding trades at undemanding multiples only 8.6x 2017e P/E and 1.4x P/B (while offering an average ROAE of c19% till 2020e). We also see catalysts materialising in the form of minority buyouts and further expansion opportunities, which we do not account for in our numbers. Hence, we reiterate our Buy rating on EK Holding.
Streamlining the business model; divestments and acquisitions are in the pipeline
Building upon the company’s strategy from 2016 to streamline its operations, which saw incremental equity stakes being bought in Natgas and the deconsolidation of Tri-ocean, EK Holding is currently bidding to acquire an additional stake in Alexfert (through acquiring up to 30% in Bawabat Al Kuwait – the major shareholder in Alexfert). EK Holding is also in the market to sell off its stake in both Egyptian Hydrocarbon Company (EHC- 4% of our TP) and Building Materials Industries Company (BMIC – 3% of our TP), in an attempt to focus on core operations. We do not yet account for either of the company’s proposed divestments or even its planned acquisition as pricing and the final outcome remains unknown. However, we believe there is an opportunity of value creation for shareholders from streamlining operations.
Keep an eye out for growth prospects; MDF project is key catalyst
While we do not account for its proposed Medium Density Fiberboard (MDF) project, we think that it will likely capture an under-served market that is otherwise catered for by imports. We believe EK Holding has a solid chance to capitalise on the growing MDF market in Egypt, while also integrating with Sprea’s complementary products such as resins and glues. Currently, management expects the project will have an investment cost of cEGP2bn (cUSD110mn), while generating an EBITDA margin of c40-45%. We estimate the project could potentially offer an IRR north of 25% (based on rough estimates).
Ahmed Hazem Maher