Appealing yield, despite an anaemic growth profile
Maintain Overweight, with limited downside. RAK trades on a 2019e P/E of c7.8x, 32% below industry peers (adjusted for growth) and our implied valuation. It offers an appealing 2019e dividend yield of 9.5%, the second highest within our UAE coverage, backed by a solid c17% 2019e FCF yield. Value could be unlocked from a demand revival in Saudi and the UAE’s construction markets, as well as, monetisation of Al Hamra Land. We revise downward our TP to AED2.50/share from AED3.30/share, mainly as we: i) cut our growth rate assumptions by 120bps, on slower-than-expected pick-up in the MENA market (60% of 2018 sales), ii) cut our perpetual growth rate by 100bps to 1%, and iii) roll over our DCF.
RAK poised to withstand short-term headwinds. Despite the current slowdown in the global economy, and the downturn in construction and real estate activity in the GCC, RAK’s strong market positioning (first in the UAE and Bangladesh, second in Saudi, and fifth in India), enables it to continue delivering 2-3% y-o-y growth. This is in addition to an outstanding EBITDA margin of c16-17%, one of the highest within peers, despite being charged cUSD10.9mm/Btu as an average gas price, c11-15% of the Group’s CoGS, more than 3x MENA peers’ average.
India’s new 10mn sqm lines’ kick off timely, Saudi may follow. We see India’s profit recovery (11% of 2018 sales) on track post RAK’s two acquisitions, reducing the company’s outsourcing and cutting transportation costs. This is in addition to better pricing power post the National Green Tribunal’s order to ban coal gasifiers at Morbi ceramic cluster. RAK mulls establishing a 10mn sqm greenfield in Saudi, to capitalise on the Kingdom’s cheaper gas prices (less than USD2mmBtu vs. the current price of USD10.9/mmBtu) and potential pick-up in construction activity.
Risks skewed to the upside. A monetisation of RAK’s 270k sqm Hamra land at 50% of its FV, equalling AED899mn, which we do not incorporate in our numbers, could trigger a special DPS of AED0.48, yielding c31%. Additionally, a pick-up in the Saudi market (9% of 2018 sales) will have a positive impact on RAK, by boosting the latter’s margins and ruling any further write-off related to RAK’s finished goods.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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