ADNOC L&S, based in Abu Dhabi, is a global energy maritime logistics company. The company delivers energy products to over 100 customers in more than 50 countries, through its three business segments - Integrated Logistics (63% of FY23 revenue), Shipping (30%), and Services (6%). The company functions as an integral part of ADNOC Group (ADNOC), providing end-to-end integrated logistics, shipping, and marine services through its total fleet of 233 owned vessels (FY23 end). ADNOC L&S’s high-quality asset fleet also serve an international blue-chip customer base, including Reliance, BP, and Aldahra.

Buoyant energy sector to provide ample revenue opportunities        

The much-coveted energy sector holds immense strategic importance for the Gulf nations. In 2022, ADNOC Group announced an investment program of USD150bn in the energy sector for the five-year period 2023 – 2027. The move is expected to serve as a major growth catalyst for ADNOC L&S, providing revenue visibility through different business prospects from the parent entity. In addition, ADNOC L&S plans to make additional investments to support ADNOC’s Group volumes, exports of hydrogen derivatives, and expand the company’s maritime service solutions.

ADNOC L&S secured a contract of USD681mn for providing offshore logistics and marine support services as part of ADNOC Group’s contract with the Hail and Ghasha development project. The contract includes Phase 1 of the Hail and Ghasha project, also provides an opportunity for the company to target Phase 2 in the 2024-2025 period. These positive developments provide long-term earnings visibility to the company, wherein most of the revenues are contracted. In FY24, the company further strengthened and modernized its asset base with new build contracts for up to 23 new energy-efficient vessels, adding in excess of 340 years of contracted income YTD.

Surge in segment sales driving profitability

ADNOC L&S reported impressive performance in 9MFY24, delivering 38% YoY growth in revenues to USD2,668mn. Segment-wise, Integrated Logistics’ revenue soared 51% YoY to reach USD1,671mn, aided by higher transported volumes. In addition, an expanded fleet, increased rates, and improved utilization drove the contribution from Jack Up Barges (JUBs) to the revenue. Shipping’s revenue grew 23% YoY to USD745mn, supported by solid charter rates for Tankers and Dry Bulk. Revenues were also positively impacted by earnings from the four new Very Large Crude Carriers (VLCCs), delivered in FY23. Services’ performance was driven by higher volumes in petroleum ports and onshore terminal operations to register revenue of USD252mn, reflecting 20% YoY growth. As a result, net profit increased 27% YoY to reach USD576mn during the period.

Driven by the solid 9MFY24 performance, brokerages now hold more favorable sentiments towards the stock and have upgraded their target price. In November 2024, five brokers raised their target prices for the company following impressive 9MFY24 results. Bernstein increased its target to 6.89 AED from 6.661 AED (outperform), Kepler Cheuvreux to 5.35 AED from 5.25 AED (hold), FAB Securities to 6.5 AED from 5.6 AED (buy), Arqaam Capital to 6.5 AED from 5.9 AED (buy), and United Securities to 6.0 AED from 4.91 AED (buy).

Strong underlying profitability paves the way for an attractive dividend policy      

ADNOC L&S demonstrated substantial growth in net profit in the last two years, clocking a CAGR of 76% to reach USD620mn in FY23. The net margin performance also marked a significant improvement from 4.6% to 22.5% over the same period. Backed by solid fundamentals, the management has adopted a progressive dividend policy and plans to increase the annual dividend per share by at least 5% annually over the medium term, starting from FY23. Accordingly, it has projected a total dividend payable of USD273mn in FY24 (USD136.5mn FY24 interim dividend paid on October 31, 2024), aligning with the expected 5% YoY growth.

Robust fundamentals and a strong bottom line enabled free cash flow to increase by a significant 148% YoY to USD347mn in 9MFY24. The impressive cash generation profile provides the company comfort to finance its investment interests before taking debt into consideration. Therefore, on the back of strong cash flows, ADNOC L&S has raised its medium-term guidance to include additional investments of over USD3bn by 2029. The company has maintained its FY24 guidance and expects to witness revenue growth of low to mid 30% range. Whereas, EBITDA growth is anticipated in the low 30% range, and net income growth is expected in the low 20% range.

Acquisition and parent backing justify high valuation premium  

ADNOC L&S’ valuation appears to be on the higher side, compared to peers. The company is currently trading at a P/E ratio of 14.6x (based on 2024 consensus estimated EPS of AED0.37), compared to the global peer average of 6.7x. We believe that the company demands a premium over its peers owing to strong revenue visibility, support from the ADNOC Group, and a positive outlook. The stock has delivered returns of over 32% on a YTD basis. Most of the analysts covering the stock have given a mean consensus of 'Buy' rating, with an average target price of over 19% from the current level of AED 5.36. Moreover, the proposed acquisition of Navig8, which is anticipated to be completed by March 31, 2025, is expected to provide immediate value accretion, boosting the company’s EPS by at least 20% in the first full year of synergy.

In summary, ADNOC L&S has made significant strides in being the preferred logistics partner for several marquee clients in the energy sector. The company’s strong asset fleet along with the anticipated acquisition of Navig8's assets should provide a strong infrastructure base to meet the varied demands of the sector. However, geopolitical risks arising out of the war between Israel and Hamas, along with persistent global recessionary fears might prove to be a near term overhang for oil and gas companies, and related industries in the Middle East region.