Further tweaks to our defensive MENA portfolio
- We increase our position in SADAFCO (short-lived spike in demand/ margins, cash 30% Market Cap), at the expense of OTHAIM (valuation, lower rental income).
- We slightly reduce our position in COMI (re-rating on government support) and rotate into HRHO (share price 46% below tNAV) after falling 50% YtD.
- Core Buy portfolio is now down 24% YtD, despite our sizeable rotation into cash (30%), reducing our cumulative performance to 372% since May 2012.
Rotating into more resilient food names and away from discretionary retailers: We upgrade SADAFCO to Core Buy and take a 2.5% position while increasing TP to SAR 165 on higher volumes amid CIVID-19 lockdown and sustainably higher margins thanks to price inflation. Current prices in KSA supermarkets suggest a 10-15% y/y higher realized price for SADAFO per liter, which should expand margin by 400bps y/y in FY 20e. Current market conditions and demand driven inflation have pushed players out of the discounting cycle, which should be sustainable as management teams across the space have more realistic expectations and are able to react more quickly to the drop in oil prices, adding to that, the herd sizes across fresh milk producers is lower than 2016-17 levels, which is likely to prevent another supply glut in the market if another round of expat exodus occurs. SADAFCO currently trades at 14.0/13.5x P/E 21/22e at a discount to food producers with cash is at 30% of market cap.
We remove Alothaim (2.5%) from our Core Buy portfolio on valuation: The current price now implies a 21.4x/20.0x P/E 20/21e at a premium to historical average and to the sector. Alothaim is seeing tailwind from panic purchases although unsustainable going into H2 20e, as households hoarded non-perishable grocery items. We expect margin gains on the back of operating leverage this year but see downside risk on shops’ rental income (21% of EPS in FY 19A) and associate income (Alothaim markets owns 14% of Alothaim real estate – which generated c.8% of EPS in dividend income). We see downside risk from supply challenges and the rise of online grocery delivery, however, the upside lies in market consolidation as smaller players see more pressure in the medium term from lower oil prices and subdued consumer sentiment.
We reduce our position in COMI from 7.5% to 5%, as the stock is now at a P/tNAV 20 of 1.4x, at the high end of MENA and African peers. CIB has one of the lowest loan/asset ratios at 31% and loan/equity ratios of 2.3x in our coverage, while maintaining one of the highest RoA ratios of c.3%, and as a such can even sustain an annual cost of risk of as high as 15% of gross loans, as compared to c.3.5% for GCC banks. However, increased rates on LCU deposits provided by public sector banks and slow CapEx demand is likely to slow asset growth to c.10-15% this year, while the shares could be susceptible to redemptions of MENA, Africa and EM focused funds, while having been propped up by government intervention.
We add HRHO to Core Buys (2.5%) trading 45% below acid test tNAV after falling 50%. The stock is down 50% YtD, as the stock is perceived as cyclical (brokerage, micro finance and leasing). We disagree and see a strong underpin to the valuation stemming from the high cash balances of the group (gross cash EGP 16.26/share), a high acid test tangible NAV of EGP 15.5 (even after a 100% impairment of its Lebanese bank and goodwill) and a USD hedge (during 2016 when EGP fell 50% in value, NAV in EGP increased 37% in value), proving tNAV uplift if the EGP depreciates. We also think HRHO could be an attractive take-over target for CIB, given its steep discount to tNAV, relative P/tNAV discount of 65% to COMI and strong positions in micro finance and leasing, which are medium term strategic opportunities for COMI.