Al Rajhi Cap initiates coverage of Bawan with ‘Overweight’; sets TP at SAR 37

Al Rajhi Capital initiated the coverage for Bawan Co.’s shares with an ‘Overweight’ recommendation and target price (TP) of SAR 37 per share.

The brokerage firm said in a research note that the company has a diversified revenue base with operations in five businesses, with steel (44% of revenue) and concrete (8% of revenue) being correlated strongly to the construction industry.

Construction activities have been picking up, with retail real estate loans by banks growing by 58% year-on-year (YoY), while new mortgage loans for 2020 growing by 83% Yoy. Given these, Al Rajhi Capital expects construction activity in the medium-term to remain strong and grow between 8-10%.

The brokerage also expects revenue from the steel and concrete segments of Bawan to grow by 15% in the medium-term.

The electricity product segment performance has been under pressure since 2018 and was impacted by lower construction activity and lower offtake from the export market. However, this segment is expected to recover in the medium-term, at the back of revival in both the domestic and the export markets.

Al Rajhi Capital expects Bawan to generate a net profit of SAR 130 million in 2021, and SAR 190 million in 2022 respectively.

Downside risks to the firm’s valuation are oil price weakness, lower mortgage demand, adverse movement of commodity prices and an increase in the working capital requirement, resulting in an increase in leverage.