HC: Orascom Construction's lower margins warrant a lower TP, we maintain OW

• Other equity investments help bridge the gap until BESIX recovers
• We cut our 2021–25e EBITDA and EPS estimates c19% and 25% and TP c22% to USD10.0/share (EGP156/share), but reiterate OW on a still compelling valuation

In a recent report, HC Brokerage issued an update note about Egypt’s construction sector, through shedding the light on Orascom Construction. HC reiterates OW on a still compelling valuation.

Mariam Ramadan, Head of Industrials at HC commented that: Business intake continues to be strong, but margin pressure is likely to stay longer: “ We are still positive on new business prospects, with the company’s project awards on track to exceed pre-COVID levels this year. In Egypt, the government continues investing heavily in megaprojects, with the new year’s budget hitting the EGP trillion mark for the first time in core sectors, including transportation, logistics, and renewable energy-based desalination. The private sector is also forecast to make a decent comeback, most notably in manufacturing, where we already see a handful of big, previously stalled industrial and petrochemical complexes start to resurface. Lately, the US market has witnessed numerous contractors face delays or cancellations on labor shortages, supply chain disruptions, and higher project costs. Still, contractors remain positive on the awaited USD1trn infrastructure package. However, with many currently forecasting the heightened commodity and energy prices and supply chain issues to persist into 2022, we opt to lower our US EBITDA margin estimates an average 0.4 pp, in line with the current level. We also reduce our MENA margin forecasts 1.6 pp, closer to the last reported figures, with which management seems content, and especially given that the building materials division performance is currently at a peak (together with the concessions represented c22% of net profit at an EBITDA margin of c24% in 1H21), in our view. It is worth noting that management had indicated potential double-digit margins for some complex mega infrastructure projects in its backlog that could provide a windfall upon completion, offering upside risk to our estimates. Other positives that have yet to reflect in our numbers include business in MENA ex-Egypt, where several memoranda of understanding (MOUs) and preliminary contracts were signed in Libya, mainly in the roads space, among other countries.”  

“BESIX’s subdued earnings continue, but other investments hold up: BESIX has lagged our expectations and management guidance of returning to profitability last year, as it engages in further cleanups, structural adjustments and faces delays in its real estate business. While the unit’s EBITDA margin has crawled back nearly to its historical levels, its net debt (again mostly related to the real estate business) has continued to expand, weighing down on its earnings contribution. Management is confident about a positive result for the whole year, but we opt to have it breaking even this year and factor in no dividend payout next year. On the other hand, other equity-accounted investees, mostly IPPs and concessions, have started to contribute more significantly to earnings. Management sees many opportunities in the pipeline over the next few months, which often not only provide a recurring income stream but also come with a construction component.” Mariam Ramadan added.
 
“Maintain OW on compelling valuation: We lower our 2021–25e EBITDA and EPS estimates an average c19% and c25% respectively, leaving our TP c22% lower at USD10.0/share, or EGP156/share on the current EGP/USD rate. Our new target price puts the company on a 2022e P/E multiple of 9.9x (trading at 4.6x) and EV/EBITDA multiple of 3.5x (trading at 1.8x), implying a potential return c116% on the 18 October closing price of EGP72.6/share. Therefore, we maintain our Overweight rating. In our view, valuation remains compelling, with the share price dropping c14% YTD, underperforming the market by c18 pp.” Mariam Ramadan concluded.

-Ends-

About HC Brokerage

• HC Brokerage has rapidly developed into one of the top brokerage firms in Egypt. HC Brokerage provides its services to a wide client base of corporate institutions and High Net-Worth Individuals. Since 1999 HC Brokerage has developed a growing client base that has benefited from a multitude of services and a trusted team that aims for the utmost benefit and client satisfaction.
• HC Brokerage is a subsidiary of HC Securities & Investment, one of the most distinguished investment banks in Egypt and the Middle East which was established in 1996 and has fully operational offices in Egypt and the middle east.
• HC Brokerage provides its clients with a wide- array of services, including: Brokerage for securities listed on the Egyptian Exchange and Brokerage for Global Depository Receipts (GDRs) issued by Egyptian companies and listed on the London Stock Exchange. In addition, Brokerage for Sovereign and Corporate bonds, Intermediation for transactions involving unlisted securities in the Egyptian over-the-counter (OTC) market and listing of companies on the Egyptian Exchange. HC Brokerage also provides Online-trading services, bonds and foreign securities trading.

© Press Release 2021