NCB Capital upgrades SEC’s recommendation to “Overweight”, TP at SAR 24.9

NCB Capital upgraded its recommendation for Saudi Electricity Co. (SEC) to “Overweight” from “Neutral”, raising the target price to SAR 24.90 from SAR 17.30.

The recent reforms in the domestic electricity sector will contribute to improving SEC’s financial position and ensure its sustainability.

Starting 2021, SEC’s revenues will be determined by Regulatory Asset Based (RAB) model, which will lead to an operating income of SAR 19.3 billion in 2021, compared to NCB Capital’s previous estimates of SAR 6.2 billion.

This new mechanism of regulating revenues (RAB model) will create a robust framework to determine the returns on SEC’s long-term capital-intensive projects and reduces investment risk.

Related: Saudi Electricity says power sector financial, regulatory reforms approved

It also indicated that the cancellation of government fees will contribute to increasing the utility provider’s cash flow.

Moreover, reclassification of government liabilities will increase interest expense by SAR 7.6 billion annually, but it will reduce net debt levels to SAR 124 billion in 2021.

NCB Capital expects SEC to realize net income of SAR 35 million in 2020, SAR 7.6 billion in 2021, which will jump to SAR 8.6 billion in 2022.

According to the data available with Argaam, SEC recently signed an agreement with the government to reclassify its net government liabilities worth SAR 167.92 billion into a subordinated perpetual financial equity-like instrument with a redemption option and a profit rate of 4.5% per annum.