EUR 22.54 For Business Accounts Only

Growth intact with catalysts in sight; Upgrade to Overweight

Attractive risk-reward proposition. We update our valuation for EKH, to account for a stretched monetisation plan at ONS, lower discount rates, and softer urea prices. We raise our rating to OW from Neutral, on lucrative upside post the stock’s price correction, based on a TP of USD1.80/share (vs. USD1.75 previously). With its: i) decent total return of c39%, ii) intact growth profile (2019-21e NI CAGR of 22%), iii) healthy profitability (c37% EBITDA margin, 23% RoAE over 2019-21e), iv) undemanding valuation (2020e P/E of 10.1x, falling to 7.9x for 2021e), v) competent management, and vi) risks skewed to the upside, EKH offers a compelling investment opportunity. As such, we flag EKH as our top industrial pick for 2020.

Energy segment to drive growth. Thanks to the ramp-up in NatEnergy’s electricity generation business, with further growth coming from the newly-landed power distribution contracts (60MW), we expect NatEnergy to grow its NP by a 2019-21e CAGR of 29%. Drilling progress in ONS’ shallow layer is bearing fruit, with 3Q19 NP doubling q-o-q. We now look for a 2019-21e bottom line CAGR of 31% for the subsidiary, as gas production stabilises at c33bn cbft p.a. vs. c17bn cbft in 2019e.

Deep layer of gas reserves likely a 2020 catalyst. We expect the market to get more clarity on the deep layer of gas reserves (not in our numbers) over the next year. The release of exploratory well results on the neighbouring Noor gas field and/or receiving the CPR report for ONS’ field could trigger a farm-out process and special dividend, assuming favourable results. This could add between 20-45% to our valuation, depending on recovery rates, capex, and gas pricing. Nonetheless, an unfavourable result will likely present a headwind to the stock.

Potential for higher dividends; Limited downside risks. A recovering FCF yield (c9-11% in 2020-21e), as the bulk of capex is out of the way, carries potential for higher DY than current management guidance of 4%. Meanwhile, declining global gas prices indicate the risk of higher feedstock for Alexfert or Kahraba is less likely.