Chagala Group (CGLO.L) Forecasts revised following 2016 results

Price: US$1.25

Market Cap: £20m

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Chagala reported a 10% increase in adjusted profits before tax in 2016, despite a 14% fall in turnover and the ongoing effects of local currency devaluation in 2015. Although EBITDA was 4% lower, operating profit increased 17% on lower depreciation and admin costs. We have revised our forecasts slightly for this year to reflect top line assumptions, but lower operating and interest costs. No dividend has yet been proposed for 2016, and the ongoing shareholder dispute may influence when or if a dividend will be declared. However, we are assuming a minimum 50% payout, in line with the company’s policy. The stock still trades on a significant discount to NAV, peers and our fair value.

Good results despite the impact of devaluation: Room and rent revenue fell 11%, due to the ongoing effects of Tenge devaluation. However, lower costs, with salaries down 24% and admin costs 12% lower, meant that EBITDA fell just 4%. Reported profits were reduced by US$1.3m of litigation costs.

Outlook has improved: Due to a more stable oil price and a gradual improvement in the local currency over the past year, the operating outlook has improved. Occupancy is still high and new sites were delivered last year at two locations.

Earnings forecasts revised lower: We are expecting slightly lower revenues in FY17, with a 1% fall now pencilled in. We also forecast EBITDA to be unchanged. With lower debt costs, we expect adjusted PBT to more than double. We thus expect the NAV to start to recover this year on the improving profitability.

The valuation discount is unchanged: NAVPS was flat last year, despite the weaker earnings, but we expect a recovery next year. The stock currently trades on a 64% discount to our 2017 NAV forecast and just 4.5x EBITDA. Recurring free cash flow is forecast to be c.US$4m a year (a yield of c.12.5%), which would easily support a potential dividend payout of up to c.US$1m.