METKA: Backlog shifts to sub-Saharan Africa

 Metka recently signed an agreement for a new power plant in Ghana, this time a typical EPC contract. The new agreement confirms in our view the company’s interest in sub-Saharan Africa that appears to be quite a promising new market for Metka, which faces challenges in its established markets of the MENA region due to geopolitical risks.

 Starting from Ghana – Ageing power infrastructure in Ghana does not appear to be sufficient to meet increasing power demand. Assuming Metka continues with its solid track record in delivering projects in a timely and profitable manner, the company will be well positioned to undertake additional projects in Ghana, which seems committed to an ambitious capacity expansion plan, with installed capacity reaching almost 5GW by 2022 (from 2.8GM currently). New capacity installations seem to be skewed towards gas-fired technologies, Metka’s area of specialization.

On top of opportunities in Ghana, Metka’s exposure in the country might open the way for its expansion in the broader area. The successful development of the energy sector will be crucial in achieving a satisfactory pace of economic and social development in sub-Saharan Africa so we expect energy-related activity in the area will be high. Increased power demand has activated plans for large-scale energy infrastructure projects and an increasing number of countries are looking into ways to attract investors that will finance said projects.

Electricity de-regulation, which is underway, is key in IPPs playing an increasing role in providing the necessary capacity additions. In this context, we expect the region to be a key contributor to Metka’s backlog replenishment and be able to maintain our assumed backlog size of EUR650mn over the medium term.
 
Buy on valuation grounds – We have revisited our model to reflect the new contract in Ghana as well as changes regarding the remaining backlog in Syria (project on hold). We set our target price at EUR8.80 per share from EUR10.5 previously, reflecting mainly a lower multiples valuation resulting from a recent de-rating of Metka’s listed peers.

We highlight that on our numbers, Metka would trade at 13.3x PE and 2.5x EV/EBITDA on 2017e target multiples. Current price levels imply that Metka would trade 0.7x earnings excluding net cash while at our target price, Metka would trade 4.1x earnings on 2017e numbers, still at an undemanding multiple.

Despite the downgrade, our new TP still implies a sizeable upside from current levels and we find the market discount largely unwarranted, taking into account that Metka is trading close to its all-time low on EV/Backlog multiples and at a heavy >60% discount to its listed EU peers. Granted, the discount narrows if we exclude the stalled Syria project so we highlight that the company needs to follow through with backlog replenishment. On our target price, Metka would trade 0.17x EV/Backlog, in line with peers.