November 28, 2018/Cordros Update

We initiate coverage of SAHCO with a target price (TP) of NGN5.97/s, representing an upside of 28.44% relative to its IPO price of NGN4.65/s. We have valued SAHCO using a pure-DCF valuation methodology, evaluating the company’s assets across its ramp and cargo handling business, in addition to future investments. Our positive investment case for SAHCO centres on the fact that the company represents a long-term play on air traffic and aviation industry growth and benefits from high barriers to entry.

SAHCO is a part of the SIFAX Group, a Nigerian conglomerate with diverse investments in maritime, aviation, and oil & gas among others, operating globally. The company’s history dates back to 1958 when it operated as a department of the now -defunct Nigerian Airways. SIFAX Group acquired SAHCO from the federal government in 2009, following a lengthy and complex bidding process. The company will be the second of the four licensed aviation ground handling companies in Nigeria to be listed on the stock exchange, following NAHCO Aviance.

Incredible growth story

SAHCO has become somewhat of the ‘poster-child’ for privatization, stemming from its incredible turnaround in performance in a short period since the government’s divestment. Management has stated its intention of sustaining the company’s impressive post-privatization performance, listing key strategic goals as (i) expansion of revenue, (ii) cost control and reduction, (iii) customer satisfaction, and (iv) stability and sustainability. The goals are expected to be achieved leveraging upon four major capabilities and activities which are discussed in detail in this report.

Nigeria has strong potential

In our view, the Nigerian market is transitioning, from an economic standpoint – following three challenging years – and 2018 and beyond appear to be promising years for SAHCO to take advantage of. Firstly, we see economic growth benefitting from higher government and private sector spending, both riding on improved revenues from crude oil. Secondly, improved oil earnings should further improve FX liquidity and sustain stability, after the volatile era.

Investment positives

Here, we highlight (1) exposure to long-term expansion of air traffic, (2) improvement in macro environment, (3) relatively under-geared balance sheet, and (4) competitiveness enhanced by ISAGO registration

Risks

The key downside risks we identify are (1) weaker-than-expected macroeconomic performance, (2) operations are susceptible to labour action, (3) revenue downside from potential insolvency of some airline customers, and (4) regulatory risk. 

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