National Central Cooling Co. (Tabreed) has just announced that it has successfully signed its first agreement for cooling services with Andhra Pardesh Capital Region Development Authority (APCRDA) to build, own, operate, and transfer a 20KRT district cooling plant in Amaravati (The new Capital of Andhra Pradesh) under a 30-year concession agreement. This will be Tabreed’s first venture out of the GCC and widens the company’s geographic reach to six countries. Based on the announcement, the cooling services are expected to commence by 2021.  

As per our discussion with management, the following details were conveyed pertaining to the new 100% owned venture: 
The project was not included in the company’s 65KRT capacity growth guidance, which we think offers upside to our growth expectations in 2021 onwards; 
Capex and returns are expected to be in-line with Tabreed’s remaining assets; and 
Tariffs were structured in a way to offer Tabreed’s required returns, while not including a CPI escalation clause for capacity payments.
Growth opportunities seem to be opening up for Tabreed…It has nearly been a couple of years since ENGIE bought a 40% stake in Tabreed and the promise to expand beyond GCC was made, and this now seems to be materialising. While local media in Egypt had highlighted that ENGIE is looking into district cooling projects in Egypt last year (likely through a partnership with Tabreed, in our view), eventually nothing came through to the market. We believe this move into new markets to be a strategically positive move for a company that’s looking to widen its geographic reach. 

We continue to like Tabreed’s visible cash flow structure and defensive utility nature of the business. We estimate that the stock i) trades at an attractive 2018 P/E multiple of c11x, which has room for growth as ventures out of GCC seem to be materializing; ii) offers a solid FCF yield of c12%; and iii) a premium dividend yield within MENA utility names of c5.6%. Accordingly, we reiterate our Buy rating on the name.

Ahmed Hazem Maher, Menna Khafaga

Tabreed (DU): AED1.70 as of 12 Feb. 2019, Rating: Buy, TP: AED2.40/share, MCap: USD1,258mn, TABREED UH/TABR.DU