Expansion Into India And Egypt And Carbon Initiatives Will Boost Future Prospects In Cooling Industry

Key Takeaways

• Strategic expansion into the GCC and emerging markets is poised to drive revenue growth through increased cooling capacity.
  
• Emphasis on sustainability and debt reduction enhances net margins, while international expansion and M&A diversify revenue streams.
  
• Heavy reliance on the UAE market and slower international expansion pose risks to revenue diversification and growth.

Catalysts

Supplies chilled water in the United Arab Emirates and internationally.

• Tabreed's organic growth strategy includes the expansion of cooling capacity to meet increasing demand, particularly in the GCC region and emerging markets like India and Egypt, which is expected to drive revenue growth.
  
• Emphasis on sustainability initiatives, such as the verification of their carbon standards and participation in carbon trading, could lead to improved net margins due to enhanced operational efficiencies and environmental benefits.
  
• The growth in variable and fixed charges linked to CPI indexation and increased capacity is expected to enhance total earnings as more projects come online in the medium term.
  
• The company’s focus on debt reduction through strategic Sukuk buybacks while maintaining strong cash flow generation is set to positively impact net margins by reducing interest expenses.
  
• Expansion into international markets and potential M&A opportunities are likely to accelerate revenue growth and diversify the income mix, providing a more stable earnings base.

National Central Cooling Company PJSC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming National Central Cooling Company PJSC's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.4% today to 24.3% in 3 years time.
• Analysts expect earnings to reach AED 662.8 million (and earnings per share of AED 0.22) by about March 2028, up from AED 570.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as AED774 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2028 earnings, up from 13.2x today. This future PE is greater than the current PE for the AE Water Utilities industry at 15.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.2%, as per the Simply Wall St company report.

National Central Cooling Company PJSC Future Earnings Per Share Growth

Risks

• Deconsolidation of Tabreed Parks Investments and lower CPI indexation growth in 2024 led to a comparatively lower reported revenue growth of 1%, which might impact future revenue growth expectations.
  
• Shortfalls in capacity guidance due to delays in real estate project completions and M&A discussions being at early stages could impact future revenue and earnings growth if not rectified.
  
• Increasing interest rates and upcoming debt maturities in 2025 might lead to higher refinancing costs, affecting net margins and potentially curbing future earnings if debt is not managed efficiently.
  
• Stable dividend payouts despite a decrease in net profit before taxes could indicate limited room for dividend growth, potentially affecting future shareholder returns and attractiveness.
  
• Heavy reliance on the UAE market, with 83% of connected capacity, and slower expansion in larger international markets like India and Egypt, poses a risk to revenue diversification and growth if regional demand decreases.

Valuation

• The analysts have a consensus price target of AED3.697 for National Central Cooling Company PJSC based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of AED4.35, and the most bearish reporting a price target of just AED3.17.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be AED2.7 billion, earnings will come to AED662.8 million, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 19.2%.
• Given the current share price of AED2.64, the analyst price target of AED3.7 is 28.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.