Jafz Sukuk Ltd:FY15results and sukuk valuation review

　　Strong FY15 results– steady earnings growth; leverage at historic lows

　　Jebel Ali Free Zone (JAFZ) reported solid FY15 results demonstratingimprovement on both the earnings and balance sheet front. Revenuesincreased 7.3% YoY to USD493m and EBITDA strengthened by 6.3% YoYresulting in strong EBITDA margin of ~80%. Revenue increase was driven byboth price increase and volume growth as the company added 570 newcustomers during the period and maintained high occupancy levels acrossvarious leasing facilities. We find JAFZ’s margin levels to be sustainable giventhe company’s high share of leasing revenues (86%). On the balance sheetfront, JAFZ’s total debt almost halved YoY to USD642m following earlyrepayment of AED2bn of Islamic loan facility in Dec-15, four and half yearsahead of its scheduled maturity in June-2020. Therefore, net debt also loweredto ~USD588m from USD814m a year ago. Net leverage now stands at itslowest ever levels at 1.5x (even lower than its parent DPWDU’s net leverage of3.4x) compared to 2.2x a year ago. Although, early loan repayment resulted inlowering of liquidity as Cash balance declined to modest USD55m. However,this should recover soon given the company’s strong cash generation capacity(FY15 FCF of USD242m). Moreover, the company does not face any debtrepayments until the maturity of its June-2019 Sukuks and its interestcoverage ratio sufficiently covers for annual interest expenses.Following this strong financial and operating performance, we maintain ourpositive credit outlook on JAFZ.

　　Maintain Hold on JAFZSK ‘19s underpinned by fair valuations

　　At current price levels of USD112/177bps/2.86% (Mid price/mid Z spread andMid Yield), we view JAFZSK ‘19s as fairly valued and in line withsector/regional peers. Interestingly, we compared JAFZSK ‘19s vs. their parentDPWDU ‘20s and found that former are trading ~20bps wider than the latter,suggesting marginal spread pick-up. However, looking at their recentperformance, we note that JAFZSK ‘19s have tightened significantly by over100bps since their highs around mid January-16 (in spread terms). This leaveslittle room for further spread tightening from current levels, in our view.Technical factors such as increased new issuance from the region (as alreadywitnessed YTD) are also likely to keep spread tightening in check, in our view.Keeping all the above factors in mind, we maintain our Hold recommendationon JAFZSK ’19. We could consider upgrading them to Buy should theycheapen from current levels (say around 200 bps in spread terms), ceterisparibus. Upside risks: strong business activity in the free zone propelling rentalprices and volume growth, improvement in liquidity and overall credit metricsresulting in a rating upgrade etc. Downside risks mainly includes escalation ofgeopolitical tensions in the GCC, sharp downturn in Dubai’s economy andresultant deterioration in JAFZ’s financial health.