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TABREED UH | Defensive play with decent upside

Limited short-term triggers. Tabreed’s stock underperformed the DFM by 31.6% y-o-y due to its low beta nature and reduced capacity to distribute dividends after a busy M&A period increased leverage. We see value in the stock, but acknowledge that short-term triggers are not tangible. Possible triggers include value-accretive M&A, or approval to raise the 49% FOL, which could be a precursor for Engie to raise its ownership. Engie paid a 1Y forward EV/EBITDA multiple of 13x for its 40% stake vs. the stock’s current 2023e EV/EBITDA of 10.9x. The listing of Empower, Tabreed’s closest peer, in 4Q22 at a high valuation could also act as a share price trigger. Otherwise, we think unlocking value will only stem from higher dividends, which we do not expect in the foreseeable future.   

Stable operations amid global turmoil. Tabreed’s DC utility model offers a high degree of stability and earnings visibility, which could become an advantage if the global turmoil worsens. Tabreed aims to raise its capacity by 120k RT (9.9%) over 2022-23. We project capacity additions and gradual deleveraging to offer a steady earnings growth rate over extended periods.

Leveraged balance sheet limits short-term dividend potential. Tabreed’s 2022e net debt stands at AED5.6bn, c5x EBITDA. We expect the company will need to refinance AED4.3bn of debt maturing in 2025 and AED1.8bn in 2027. Tabreed’s relatively high leverage levels leave limited scope for dividend payments. That said, we expect it to pay a DPS of AED0.061 in 2022, yielding 2.6% vs. global peers’ 3.7%.

Industry regulation is the main downside risk. Tabreed is a low-risk company, given its operations’ relative stability. This stands since the company has no exposure to global commodity prices, as it fully passes on utility costs to the end consumer. Otherwise, the industry is highly unregulated, posing pricing regulation as the main downside risk.