Equity Analysis /
Egypt

Orascom Construction: Q1 19 – Revenues down on shrinking US operations

    Mark Adeeb
    Mai Ayoub

    OC reported Q1 19 revenue of US$706mn, down 6.8% yoy and 9.3% qoq, owing to a 37.6% decline in US revenues that was only partially offset by a 10.3% increase in MENA revenues on an annual basis. MENA now accounts for over 76.2% of revenues. EBITDA recorded US$70.3mn in Q1 19, up 16.6% yoy and 94.2% qoq. Attributable net income came in at US$30.2mn, down 5.3% yoy and 8.8% qoq on rising net interest expense.

    MENA EBITDA remains volatile

    MENA EBITDA rose by 15.9% yoy and 98.5% qoq on the back of recognising revenues related to projects for which costs were already recognised in the previous quarter. It is worth noting that receivables that are 90+ days over due rose to US$201mn, up 8.4% qoq, which could be explained by revenues heavily skewed towards Egypt.

    US operations shrink, EBITDA margin improves

    US operations' Q1 19 revenue came in at US$168mn, down 37.6% yoy and 19.1% qoq. It declined on the back of the completion of Natgas and IFCo and the company’s strategy to focus on profitability rather than growth. Accordingly, US EBITDA margin improved to 1.4% versus 0.6% in Q1 18 and 1.0% in Q4 18.

    DPS approved, backlog covers 18 months

    The company approved DPS of US$0.30, implying a DY of 5.1%. Standalone backlog slightly rose to US$4.3bn, which provides visibility for the next 18 months. Awards in Q1 19 was US$481mn and should be higher in Q2 19 on the back of the US$739mn water treatment signed in May (US$370mn value attributable to OC).

    Reiterate Overweight; OC trading at cheap multiples

    We reiterate our Overweight recommendation on FV of EGP180/share. 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 4.4x and EV/EBITDA of 3.1x.