Investment Opportunity in an „Atomic” Company (NAC Kazatom)

Company: NAC KAZATOM (KAPq.L)

Price (24 Jan 19): $13.7

Target price: $16.7

Expected share price return: +22%

NAC Kazatomprom (KAP) is the world’s largest uranium producer, commanding a 20% share of global supply with priority access to one of the world’s largest resource bases. Company is listed on London Stock Exchange in form of GDR (KAPq.L) and at Astana International Exchange.

Rationale for investment

• Dividend Yield – estimated at 5.4% in 2018e and 10% in 2019e;
• Target price:$16.7; 22% upside potential (at current price of $13.7);
• World’s largest producer of natural uranium with priority access to one of the world’s largest resource bases and 2^nd lowest cost producer;
• Close proximity to Southeast Asian markets, incl. China, the fastest growing market for civil nuclear power;
• Potential integration into other stages of nuclear fuel cycle;
• National uranium operator – has preferred rights to develop any uranium deposit in Kazakhstan; state support.

Investment Risks

• Uranium price sensitivity- uranium mining segment accounts for c. 80% of group revenue and earnings;
• Global nuclear industry bears specific environmental, social and governance (ESG) risks;
• State fund as controlling shareholder with shares overhang and corporate governance concerns;
• Kazakhstan sovereign and political risks;
• KAP currently does not report IFRS financials for all assets.

Valuation

Financial reporting is not easy to read and understand. Privatizatized in an IPO in Nov. 2018, KAP is currently trading at an EV/EBITDA of circa 5.5x, a ~70%+ discount to its closest comparable listed peer Cameco (Canada) which is at 18x. I expect this valuation discount to narrow over time.

I estimate an EBITDA of circa KZT140bn ($370m) in 2018 and $481m in 2019. I regard a multiple of 9x2019E EBITDA or a ~50% discount to Cameco to be an appropriate multiple at which to value KAP. This translates into a upside of 22%, respectively a Target Price of $16.7.

Company has an attractive dividend policy with minimum 50% FCF payout (provided Net Debt/EBITDA<1.5x) & a $200m dividend floor for each 2018 and 2019. This translates into aprox. 5.4% dividend yield in 2018e and 10% in 2019.

Uranium Price

Given the move toward cleaner energy, reduced carbon emissions, and more secure long-term energy sources, uranium supply is becoming more important to utilities worldwide. Uranium demand is projected to increase by 9% through 2030, according to UxC.

Uranium does not trade on an open market like other commodities. Buyers and sellers negotiate contracts privately. As per the chart below, current price of $29 does not look too high from historical perspective.

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