We initiate coverage on the National Central Cooling Company (Tabreed) with a 12-M target price (TP) of AED 3.40 per share, implying an upside of 21.3% to the current market price, and a P/E’22e, and EV/EBITDA’22e of 15.7x and 12.8x, respectively. Overall, we have a positive view on DC demand on the improving business environment and a growing addressable market. We have used only one valuation methodology — Discounted Cash Flow (DCF) as there is no listed comparable regional peer of the company.
• Improving economy conducive to the DC industry. Industries and businesses are amongst the primary users of DC services. Thus, a pick-up in the economic growth and mega projects in the GCC bodes well for their growth. The IMF forecasts the GCC’s real GDP growth to jump to over 6% in 2022 from under 3% in 2021. Further, several ongoing mega projects like Neom, Red Sea Project, Qiddiya, Sea World Abu Dhabi, etc. are also positive for the DC sector. Notably, Tabreed is a part of some of these projects like the Red Sea, and Seaworld Abu Dhabi.
• GCC cooling demand is forecasted to jump multifold. According to an analysis by Strategy&, GCC’s cooling demand is expected to reach 100mn RT by 2030 from ~36mn RT in 2010 (5.2% CAGR). In contrast, the combined capacity of the two leading DC players in the GCC, Empower and Tabreed, currently stands at nearly 3mn RT, indicating immense potential for the DC industry. Currently, Tabreed is the only listed DC player in the UAE but Empower is in the process of launching an IPO, reportedly in 2H 2022.
• Capacity expansion and a utility business model gives revenue visibility. Tabreed intends to add 120k refrigeration tons (RT) capacity by FY23 over its existing ~1.24mn RT capacity. Tabreed follows a utility business model which allows it to earn the majority (~60% on average) of its revenue as a capacity charge, which is independent of the usage. Also, long-term contracts (~25 years: 85% of current contracted capacity locked in for next 10 years) provides revenue visibility. Thus, Tabreed’s top line is expected to grow at a 6% CAGR during FY21-FY27.
• Margins are expected to improve, and healthy cash flows aid in debt reduction. On the back of a stable revenue stream, pass-through costs and focus on efficiency, we expect Tabreed’s gross and EBITDA margins to improve in the range of 2.5-3.0 percentage points (pp) YoY in FY22. This is expected to lead to healthy cash flow generation which should aid in bringing down leverage, from currently ~1.3x (D/E) to 1.1x by FY24e.