Equity Analysis /
Egypt

Orascom Construction: Q2 19 – MENA operations drive top line improvement

    Mark Adeeb
    Mai Ayoub
    Al Ahly Pharos Securities Brokerage
    27 August 2019

    OC reported Q2 19 revenue of US$790mn, up 5.3% yoy and 12.0% qoq, owing to a 21.3% yoy and 7.8% qoq increase in MENA revenue (MENA accounted for 73.3% of revenue). EBITDA came in at US$72.1mn in Q2 19, up 38.7% yoy and 2.6% qoq. Attributable net income came in at US$31.3mn, down 38.1% yoy and up 3.6% qoq. The annual decline in profitability was driven by: 1) higher interest expense, and 2) lower contribution from BESIX (US$8.5mn vs US$17.2mn in Q2 18). 

    EBITDA improvement skewed towards MENA

    Q2 19 EBITDA came in at US$72.1mn, up 38.7% yoy and 2.6% qoq. The improvement was entirely driven by MENA operations whereas US EBITDA declined to US$2.2mn, down 8.3% qoq. EBITDA margin recorded 12.1% vs 12.2% in Q2 18 and 12.6% in Q1 19. It is worth noting that the company’s net cash position reached US$69mn (EGP9.8/share) vs a net debt position of US$79mn in Q1 19 and in tandem with 18% qoq decline in receivables. Receivables 90+ days overdue also declined 8.8% qoq, reaching US$183mn. 

    US top line improvement fails to flow to bottom line

    While Q2 19 revenues from the US grew 25.3% qoq, reaching US$211mn, EBITDA margin declined to 1.0% and OC achieved a net loss of US$1.1mn from US operations (EGP0.16/share). It is worth noting that the company has reached a settlement with MEI, and OC has now completed all obligations related to IOWA fertilisers. 

    Book-to-bill ratio records 1.54x

    The company’s backlog reached US$4.6bn as of Q2 19. In addition OC has recently won an award to design, build, and operate two monorail lines in Egypt and its share is close to US$900mn including O&M for 30 years. This brings announced awards YTD to US$2,315mn, which is above our FY 19 estimates of 2,175mn. 

    Reiterate Overweight; legal risk key concern

    We reiterate our Overweight recommendation on FV of EGP166/share (adjusted for the new fx rate of 16.5 vs 17.9 previously). We factor in: 1) FY 19 revenue of US$2,962mn, 2) EBITDA of US$255mn, and 3) attributable net income of US$157mn. OC is currently trading at FY 19 PE of 4.3x and EV/EBITDA of 2.6x. The key downside risk is the legal cases against the company, namely the Sidra Medical Center and the ETA case.