Orascom Construction: Bottom line impacted by lower than expected top line and BESIX losses

  • Muted revenue growth due to slowdown in US projects
  • Backlog remains solid on sustainable award momentum
  • Reiterate Overweight; Egypt underpins performance

OC reported USD23.9 million in the bottom line for 1Q21, -4.4% YoY, and -9.5% QoQ. The bottom line came lower than our estimates of USD27 million, mainly due to weaker than expected topline and USD1.4 million of losses coming from On the bright side, the bottom line was cushioned by a higher EBITDA margin which came higher than expected at 8.5% versus the estimated 7.6%, mainly caused by an uptick in MEA margin by 0.8pps on a sequential basis. MEA's net attributable profit was USD24.8 million (-23.0% YoY, +25.3% QoQ), while the US accounted for USD0.5 million of profits (-88.1% YoY, -86.8% QoQ). Net losses coming from BESIX recorded USD1.4 million which is narrower than

1Q20 losses of USD11.4 million but lower than 4Q20 profits of USD2.8 million. This quarter saw BESIX turning back to losses after two profitable quarters due to weaker performance in some projects in the Europe region. It’s worth mentioning that management stated that the group’s subsidiaries in building materials, facilities management, and infrastructure assets continue to increase in contribution to overall profits. These subsidiaries collectively recorded a YoY increase in EBITDA and net income along with double-digit EBITDA margins in 1Q21. Net income contribution from these subsidiaries accounted for over 10% of the Group’s total net income. In addition to the Group’s current subsidiaries, which include steel fabrication, curtain walling, construction chemicals, facilities management, wastewater treatment, and renewable energy, the Group continues to evaluate new opportunities that provide recurring income

Muted revenue growth due to slowdown in US projects

Revenue stood at USD817 million in 1Q21 (-1.3% YoY, -12.0% QoQ). MEA comprised 71% of revenue while the US accounted for the balance of 29%. The company’s top line came lower than our top line estimate of USD902 million mainly due to weaker revenue coming from the US, MEA region grew by 4.9% YoY, -2.5% QoQ. US revenues came lower on an annual and sequential basis (-13.9% YoY, -28.9% QoQ). We expect the top line to come stronger throughout the year to reach USD3,371 million on solid execution rates in transportation, infrastructure, and water plants projects.

EBITDA came in at USD51.0 million (-20.4% YoY, +7.4% QoQ), while EBITDA margin recorded 6.2% (-1.5pps YoY, +1.1pps QoQ). MEA accounted for EBITDA of USD49.2 million (-18.5% YoY, +7.7% QoQ). EBITDA margin is 8.5% (-2.4pps YoY, +0.8pps QoQ). US accounted for EBITDA of USD1.8 million (-51.4% YoY, 0.0% QoQ), EBITDA margin is 0.8% (-0.6pps YoY, +0.2pps QoQ). EBITDA came lower on a YoY basis but higher on a QoQ basis due to slightly higher sequential MEA and US margins. The management expects 2021 profitability to be in line with 2020 levels.

Backlog remains solid on sustainable award momentum

The consolidated backlog stood at USD5.4 billion, in line with 1Q20 but slightly dropped by 0.7% QoQ, The company was able to maintain its strong backlog on solid awards momentum during the quarter which recorded USD666 million, surging by 11.2% YoY but dropped 27.6% QoQ. New contracts of USD570 million signed in the MEA region in 1Q21 include contracts in the transportation and infrastructure sectors like Egypt’s first high-speed rail system contract with the National Authority for Tunnels (NAT) along with Siemens Mobility and Arab Contractors, that will connect Ain Sokhna to Al Alamein while passing through the New Administrative Capital with a total value of USD3 billion. Moreover, OC signed contracts to build the Magdi Yacoub Global Heart Centre in Egypt and Emaar’s Vida Marina Hotel & Yacht Club in Marassi. The US subsidiaries signed a humble figure of USD96 million worth of awards in 1Q21, mostly in the commercial and light industrial sectors, however, the company expects an increase in USA awards in 2Q21 especially in the data center sector.

Net cash still healthy despite falling sequentially

The company's net cash position stood at USD140.2 million (EGP18.80/share) on March 2021 end which is down from the USD359 million seen in December 2020 end, owing to normal working capital cyclicality during the beginning of the year.

Reiterate Overweight; Egypt underpins performance

We reiterate our overweight recommendation on ORAS with FV of EGP125. We believe that the company is well-positioned to benefit from infrastructure, transportation projects, and water treatment in Egypt. Provided that wave three of the pandemic does not slow down executions, we see recovery over the next few quarters for executions and awards. The US turning profitable is another bright spot. We value OC at USD6.1/share and BESIX at USD1.7/share. The shareholders approved a dividend to shareholders of USD27 million (USD 0.2313 per share) implying a DY of 4.3% and FY20 payout ratio of 29.7%, marking the fourth consecutive year of dividend distributions and the first of two expected installments. The company distributed USD0.43 per share in 2020 on FY19 profits with a payout ratio of 40.4%. ORAS is currently trading at FY21 P/E of 4.96x (which is below its 5-year P/E average of 9.2x) and EV/EBITDA of 2.50x.

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