Orascom Construction (ORAS EY, OC DU): The company’s 1Q22 consolidated net profit dropped 45% y-o-y to USD13.1m, according to its audited financial statements. The company’s board proposed a DPS of USD0.2313 for FY21 that the company will pay in 3Q22. (Company data)
Our comment: The company’s net income came c61% lower than our estimate and c55% lower than the Bloomberg consensus estimate mainly due to subdued performance from BESIX, which turned in the red, weighing down on ORAS profitability by USD11m. Net profit excluding BESIX stood at USD24.1m, c13% lower than our net income estimate excluding BESIX of USD27.3m. The company’s backlog increased c2% y-o-y to USD5.52bn, in line with our estimate of USD5.54bn (-0.3% deviation), incorporating the effect of the EGP devaluation. New awards decreased c7% y-o-y to USD618m, c13% lower than our estimate, with c53% of the new awards coming from the MEA region and c47% coming from the USA, almost in line with our awards’ composition of c52%, c45% and c3% from MEA, the USA and rest of the world, respectively. BESIX backlog increased c2% y-o-y to USD5.573bn, and came c2% higher than our estimate, while its new awards dropped c29% y-o-y to USD858m, in line with our estimate of USD857m. Revenue increased c20% y-o-y to USD980m and came c4% higher than our estimate, with revenues from Egypt and the Egyptian government increasing c25% and c24% y-o-y to USD701m and USD580m, respectively, higher than our estimates by c17% and c21%, respectively. Revenue from the USA was almost unchanged y-o-y at USD236m, yet came c18% lower than our estimate of USD288m. BESIX revenue was almost unchanged y-o-y at USD780m and came c16% lower than our estimate. Gross profit increased c11% y-o-y to USD92m and came in line with our estimate, only c1% higher. GPM decreased 0.8 pp y-o-y to 9.3% and came lower than our estimate by 0.3 pp. SG&A expenses increased c22% y-o-y to USD56m and came c7% higher than our estimate, lowering EBIT by c7% y-o-y to USD37m, c5% lower than our estimate. Accordingly, EBITDA dropped c1% y-o-y to USD50m and came c7% lower than our estimate. EBITDA margin decreased 1.1 pp y-o-y to 5.1%, 0.6 pp lower than our estimate, with MENA margin dropping 2 pp y-o-y to 6.5%, 0.6 pp lower than our estimate and the US margin was almost unchanged y-o-y at 0.8%, 2.2 pp lower than our estimate. EBIT margin dropped 1 pp y-o-y to 3.8%, 0.3 pp lower than our estimate. Income from equity accounted investees surged 3.13x y-o-y to USD5m, c12% higher than our estimate of USD4.5m. BESIX proforma contribution to income dropped significantly, weighing down on ORAS profitability with a negative contribution of USD11m in 1Q22, from a negative contribution of USD1.4m a year earlier, reversing the outstanding positive contribution of USD10.8m in the previous quarter. BESIX 1Q22 contribution comes significantly lower than our estimate of a positive contribution of USD8.6m on lower-than-expected revenue, and we await further clarification from management on the subdued performance. FX gains and losses almost netted out at the group level, and the effective tax rate came in higher y-o-y and higher-than-expected at c45% (compared to c32% a year earlier) due to deferred taxes of USD6.6m versus our estimate for the effective tax rate of c25%, lowering net income c45% y-o-y to USD13.1m, c61% below our estimate of USD33.3m. The proposed FY21 DPS comes c32% lower than our estimate of USD0.34, implying a payout ratio of c24% lower than our estimate of 40%, and offers a net-of-tax dividend yield of 5.18% on the 19 May closing price.
Our comment: The new awards figure comes a substantial c44% ahead of our estimate of USD766m, with the US beat more than offsetting the miss from Egypt. Management had hinted that 2Q21 would make up for the weak awards in the previous quarter especially in the US in data centers, with 1H21 overall now looking strong, though the mix is clearly less optimal for margins. We expect the relatively weak awards from Egypt will be made up for as the company signs the final contracts for the high-speed rail likely in 3Q21 when the financing is complete, among other projects in the transportation sector pipeline. The industrial segment in Egypt is seeing initial signs of a comeback, in our view, though still mainly government related, with this quarter’s bit likely reflecting the two EGP2.6bn textile manufacturing complexes signed last week. The backlog figure, however, suggests executions during the quarter could have come in below our expectations, which we will be able to confirm along the release of the 2Q21 financials.