EUR 49.59 For Business Accounts Only

EKHO EY | Strong upside; Share conversion a catalyst

Value, growth, and yield, with catalysts. EKH offers a decent upside of c36%. The potential rerating triggers are: i) the share currency conversion programme, due in September, ii) strong earnings growth (32.8% in 2021e and 8.8% CAGR over 2021-23e, driven by the global commodity price rally and EKH’s expansion plans), and iii) attractive dividends, paid in USD for all shareholders, yielding 6.1% in 2021e and 6.5% in 2022e. EKH trades on a 2022e EV/EBITDA of 4.9x, falling to 4.5x in 2023e vs. 8.0x and 7.7x for global fertilisers and chemicals peers.  

Share currency conversion programme to improve liquidity. On 15 June, EKH’s EGM approved a share conversion plan, enabling willing shareholders to convert USD shares into EGP, over a period ending 14 September. This is while keeping the functional, reporting, and dividend currencies unchanged at USD. The plan is positive, in our view, because it will help improve the share liquidity and broaden EKH shareholders base, acting as a catalyst to the stock. EKH’s liquidity improvement could be grounds for MSCI EMSCI inclusion over time, potentially attracting USD38mn in passive inflows.

On an expansion spree. EKH plans to invest USD500mn over 2021-25 across six segments (c83% of the current IC). This includes: i) USD115mn in ONS for the drilling of new wells, ii) USD45mn in Sprea to add and raise capacity across various products, and iii) USD70mn for the completion of the 360k tpa greenfield MDF plant, among other investments. This should not impact the company’s dividend potential, on our estimates, thanks to its liquid balance sheet (USD9mn in net cash in 2021e), and strong cash flow generation potential (total of USD902mn in FCFF over 2022-25e, with an average FCFF yield of 17.7%). We believe EKH’s expansion plans are positive, with a strong track record of value-accretive investments (average 2016-20a RoE of 20.5%). 

ONS deep gas layer potential advantage. We do not factor ONS’s deep gas layer (discovered in 2019) into our valuation (1.5tn cf in deep layer gas reserve vs. 821 bn cf in shallow layer p1 gas reserve), given its limited visibility. EKH’s plans for the deep gas layer do not entail cash outlay, as the company plans to develop it through: i) a strategic partnership with a major oil and gas player or ii) selling a stake in the project and using its proceeds for funding, leaving it as a potential source of upside, with no possible downside. However, the implementation of the project is likely to be extended beyond 2022e.