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Chagala reported a 17% increase in 2015 adjusted profits, despite a 16% fall in turnover and a severe devaluation in the local currency. Adjusted PBT increased 17% on lower depreciation and interest costs. We have revised our forecasts to reflect the weaker currency and lower cost environment. The stock still trades on a wide discount to NAV and yields 4.4%. Before the AGM Chagala announced it had removed voting rights from shareholders appearing to act as a concert party in connection with 15% of Chagala’s shares acquired at an 80% premium.

Good results despite devaluation: Room and rent revenue fell 15%, due mainly to the effect of Tenge devaluation. Cost control, with salaries down 14% and admin costs 11% lower and the currency effect meant that EBITDA was just 12% lower. Reported profits were boosted by a US$2.4m impairment reversal.

Earnings forecasts revised up: With a higher oil price and an improvement in the local currency since year-end the operating outlook has actually improved. Occupancy is still high and new sites have been delivered in Atyrau and Uralsk. We now forecast EBITDA to be 2% higher. Following debt repayment, we expect adjusted PBT and EPS to increase 80% and for NAV to start to recover this year.

Concert party announcement: On 10th June Chagala’s board served direction notices on shareholders representing c.40% of the total stock, which it determined was acting as a concert party in acquiring shares. This prevented them voting at the AGM and postpones them receiving distributions. The restrictions will remain unless the group makes an offer for all remaining shares, which seems unlikely.

Valuation discount remains: Although NAVPS fell 24%, due to the currency weakness, the stock is trading on a 65% discount to our 2016 NAV forecast. It now yields over 4% and is valued at 4.8x EBITDA. Recurring free cash flow of c.US$5m is forecast in 2017, which should support the intention to raise the dividend payout.