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MENA construction sector | All eyes on Saudi’s long-awaited rebound

Saudi construction market to outperform, replenishing the region’s backlog. 2019 marks a strong comeback for the Kingdom, with 2019 y-t-d award intake recording an 82% hike to USD29bn, boosted by aggressive investments in the oil, gas, and water segments. This represents 38% of MENA 2019 y-t-d new awards of USD75bn (-13% y-o-y), compensating, to a large extent, for the 40% and 70% drop in the UAE and Egypt’s awarded projects. The Kingdom’s 2019-20e pipeline includes USD70bn worth of projects (out of USD243bn of tendered projects across MENA), making contractors with the highest exposure to the Saudi market the best positioned once the rebound starts to materialise.

Elsewedy Electric: Superior revenue visibility, healthy cash flow. Elsewedy ranks high in terms of: i) revenue visibility for its turnkey segment (book to bill 3.7x), ii) coming at decent margins, despite assumed normalisation (consolidated EBITDA margin c12%), yielding solid RoEs of 24% over 2019-21e), and iii) healthy FCF yield (13.5%, on average over 2019-21e) with BS in net cash position. We expect earnings to grow by a 2019-21e CAGR of 7%, backed by the vigorous evolution in the backlog (2Q19a + 91% y-o-y). Elsewedy trades on a 2020e P/E of 6.9x, reflecting a c40% discount to the peer average.

Orascom Construction: Ultra-cheap valuation stifled by legacy claims. OC stands out among MENA contractors, thanks to its well-diversified backlog and Saudi exposure. We foresee an impressive 23% surge in 2019e award intake, resulting in an 11% hike in 2020e revenue and translating into a 2018-20e EBITDA CAGR of 9.8%. OC trades on an excessively attractive 2020e P/E of 4.1x, unwarranted, in our view, despite the ongoing concerns related to the contractor’s USD129mn (or EGP18.5/share) tax dispute, for which we account in our numbers.

Arabtec: The most fragile within our coverage. 2019 is shaping up to be even worse than 2018 for Arabtec, amid a slowdown in UAE construction activity (y-t-d award intake dropped by 40% y-o-y), coupled with a management reshuffle. The contractor’s 1H19 earnings were halved on a y-o-y basis, dragged by a 17% drop in award intake, coming 35% short of management’s target. This was coupled with a 1.5ppt drop in margins, mainly from higher SG&A. We maintain our Neutral rating, with a 20% lower TP, until the company reverts back to its strategic roadmap.