EUR 37.26 For Business Accounts Only

Strong fundamentals priced-in; Downgrade to N

Raise TP by 21% to USD1.75/share, warranting Neutral post rally. EKH rallied 47% y-t-d, outperforming EGX30 by 28%. We raise our TP to: i) incorporate the additional 130bcf of shallow layer gas reserves, based on updated management guidance, while cutting 2019e production, due to adverse weather conditions, and ii) factor in higher power and gas distribution at NatEnergy. Our TP implies a 2019e and 2020e P/E of 15.5x and 11x, respectively (vs. 12x and 9x for our Egypt industrials coverage), fairly capturing the growth profile (2018-21e EPS CAGR of 30%), in our view, and more so when considering ONS’ finite resource nature and sizable contribution to 2020e earnings (c33%). We argue that assigning value for the deep target layer of gas reserves is premature.   

Solid growth potential across business lines captured by the market. EKH stands out as a quality name, with a high degree of earnings visibility, backed by a competent management team. The company’s growth plans are on track, with NatEnergy (27% of TP) expected to grow its earnings by a 2018-21e CAGR of 32%, buoyed by higher gas and power distribution, along with electricity price increases. Meanwhile, Sprea (21% of TP) is set to benefit from higher export volumes and enhanced efficiencies, reflecting a 2018-21e earnings CAGR of 15%. ONS (19% of TP) is ramping up and should have a sizable contribution (c34%) of group profits over 2019-25e, on its lucrative margins, while the MDF plant (4% of TP) is on course to commence production late-2020e.     

Deep target gas reserves still uncertain; Timeline extended. While the deep target layer holds sizable gas and condensate reserves, the economic feasibility is still uncertain. Based on recent management guidance, it will take 12-18 months for the results of the exploratory wells to manifest, costing USD70-80mn, to assess economic feasibility, which renders it more of a medium-term catalyst.