Equity Analysis /
Egypt

Orascom Construction: Slower execution and softer awards momentum in sight

  • Q1 20 daily cash burn recorded US$1.8mn, which we think is acceptable given current circumstance

  • We trim our FY 20 revenue estimate to US$2.7bn from US$3.07bn; awards estimate to US$1.9bn from US$2.6bn

  • Cut FV to EGP125; reiterate Overweight

Cash burn within acceptable levels; Dynamics look better than expected

The company’s net cash position declined to USD114mn, implying a daily cash burn of USD1.8mn during the quarter, which we think is acceptable given current circumstances. We do not rule out that the cash burn will likely continue in 2Q20 but at softer rates.

Softer-than-expected preventative measures

We are slightly comfortable now as the company noted that “execution at nearly all projects is currently ongoing; execution was briefly halted in Q2 2020”. We are also comfortable that the backlog is heavily skewed towards infrastructure (65.4%) which should result in fewer defaults or project terminations.

Execution rates to decline; awards momentum to soften in 2H20

Looking ahead, we are now more inclined towards slower execution rates rather than complete shutdown, especially in Egypt which accounts for north of 60% of revenue weight and softer awards momentum in 2H20. Accordingly, we cut our revenue estimate to USD2.7bn vs 3.07bn previously and awards to USD1.9bn vs USD2.6bn. We will watch closely the company’s awards momentum. Nevertheless, the company’s backlog remains solid at USD5.4bn which implies book-to-bill ratio of 2.0x based on our new revenue estimate.

BESIX to bear the brunt of Covid-19

BESIX reported attributable loss to OC of USD11mn in 1Q20 on some project adjustments mostly in the UAE. We expect BESIX to report weak results in FY20 since the company operates in markets that were severely affected by almost complete lock down. Looking ahead, we factor in a loss of USD27mn attributable to OC vs our previous net income estimate of USD42mn.

Cut FV to EGP125; Reiterate OW

We trim our FV to EGP125 vs EGP170 previously due to the above mentioned factors. We will continue to monitor market dynamics closely for either further downgrades or upgrades. We value OC at USD6.1/share and BESIX and USD1.7/share. OC is currently trading at FY20 P/E of 8.1x and EV/EBITDA of 3.6x. 

Comment on 1Q20 Results

BESIX weighs on bottom line for the second consecutive quarter 

OC reported 1Q20 revenue of USD828mn, up 17.3% y/y and down 7.9% q/q and above our estimate of USD790mn. MENA accounted for 66.8% of revenue in 1Q20 vs 61.4% in 4Q19 and 73.3% in 1Q19. EBITDA came in at USD64mn, down 8.8% y/y and 6.4% q/q, owing to sequential decline from US operations, and below our estimate of USD72mn. Attributable net income came in at USD25mn, down 17.2% y/y and 9.4% q/q, and below our estimate of USD38.2mn, owing to losses from BESIX for the second consecutive quarter.