Earnings Report /

Orascom Construction: Q4 19 – Preventive measures to weigh down on burn rate

  • Awards momentum could slow down, but Egypt needs to invest heavily in the water sector

  • Share price overly discounting a slow down in construction activity

  • ORAS trading at FY20 P/E of 3.3x and EV/EBITDA of 1.0x; reiterate Overweight

Al Ahly Pharos Securities Brokerage
26 March 2020

Topline and EBITDA beat estimates; bottom line down on BESIX losses

OC reported 4Q19 revenue of USD899mn, up 15.5% y/y and 13.8% q/q and above our estimate of USD784mn. MENA accounted for 61.4% of revenue in 4Q19 vs 65.1% in 3Q19 and 73.3% in 4Q18. EBITDA came in at USD69mn in 4Q19, up 89.2% y/y and 19.5% q/q, owing to US operations swinging into positive territory sequentially, and above our estimate of USD61mn. Attributable net income came in at USD28mn, down 16.6% y/y and 14.3% q/q, and below our estimate of USD41mn. Bottom line was hit by losses from BESIX of USD3mn during the quarter. 

What we know and what we don’t know about Covid-19

We expect preventative measures to result in a slowdown in construction sites or possibly a complete shut down if lock downs become more severe. While ORAS reported a strong net cash position of USD279mn (roughly 55% of market cap) on the back of a USD199mn spike in construction contracts advance payment during the quarter, we expect its net cash position to deteriorate as 1) the advance payment account reverts to normal levels, 2) the operational slow down to result in a higher cash burn, and 3) working capital requirements increase. That said, we are unable to determine the exact impact on operations since this will largely depend and how severe and how long the lock down will last in key markets. 

Awards could slow down, but Egypt needs to invest heavily in the water sector

FY19 awards came in at USD3,550mn vs our estimate of USD3,220mn, thanks to the USD900mn Monorail award and the USD370mn water treatment award. The backlog stood at USD5,445mn, implying a book-to-bill ratio of 1.7x. We do realize that current circumstances will result in a slow down in awards momentum. Nevertheless, Egypt has to invest heavily in the water sector to combat water shortage which could be as big as the investments the country made in 2014 in the power generation sector. 

Reiterate OW; DPS of USD0.21 proposed and another round could be in sight

ORAS and SWDY are currently our top picks among the Industrial coverage. The current share price is overly discounting any potential negative impact on construction activity resulting from the lock down whether it lasts for weeks or months. OC is currently trading at FY20 P/E of 3.3x and EV/EBITDA of 1.0x. The BoD has proposed DPS of USD0.21 (DY4.8%) and a second round could take place depending on how events will unfold in FY20. Accordingly, we maintain our FY20 DPS estimate of USD0.5 (DY 11.5%).