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MENA construction sector | Favourable regional conditions, Egypt to outgrow

Egypt offers the highest sustainable growth. Egypt has been outperforming its GCC peers over the past half-decade in terms of growth, with a steady 20% CAGR in cash spending on construction activity (USD24bn in 2018e). Egypt’s 1H18 award intake came in at USD18bn, burgeoning by 125% y-o-y, with 2018 total awards seen at USD36bn. The country’s 2018-19e pipeline stands at USD20bn, USD11bn out of which is power projects, while the balance mainly pertains to infrastructure projects. The interest on alternative and renewable power projects mirrors the government’s goal to lower Egypt’s natural gas use in thermal power plants to 80% in 2022 vs. the current 94% (natural gas use in power plants currently represents 60% of Egypt’s total natural gas consumption).

GCC rebound to be confirmed. According to MEED Projects, the GCC’s 2018 award intake should reach USD159bn, increasing by 30% y-o-y, thanks to higher oil prices, allowing GCC economies to hike their public spending on infrastructure. The pick-up is notably coming from Saudi Arabia, with a 2018 award intake seen at USD56bn, two folds that of 2017. However, with the flat y-o-y growth in award intake across the GCC to USD51bn in 1H18 (32% of 2018e figure, USD15bn of which in Saudi), we remain sceptical about the GCC’s rebound, given the lack of visibility regarding the execution timeline of the projects.

OC: Best play on Egypt’s growth, valuation unchanged. OC trades at 3.1x 2019e EV/EBITDA, c56% discount to EM peers, with a 2018-20e EBITDA CAGR of 8.8%, while offering a 2018e dividend yield of 6.4%. As OCI N.V.’s exposure came to an end in Jun-2018, we expect the contractor to continue delivering a clean EBITDA margin, ranging 8-9%, up from 5.8% and 2.5% in 2017 and 2016, respectively. 1H18 awards stood at USD983mn, c43% our 2018 estimate of USD2.3bn, not a red flag, in our view, given the contractor’s strong 2018-19 pipeline in MENA, standing at USD15bn. Furthermore, we foresee a 2018e EPS growth north of 100%, mainly driven by a decrease in the company’s blended tax rate, following the cut in US tax rate to 21% in January 2018.

Arabtec: P&L momentum to continue, award intake raises concerns. We cut our TP by 12% to AED2.25/share, mainly as we downgrade our award intake estimate to AED7bn flat, from AED8-9bn p.a. previously. This comes on the back of the contractor’s feeble y-t-d award intake, raising more concerns on the company’s backlog evolution, particularly that the bulk of Expo-related projects has been awarded. According to MEED Projects, Arabtec’s 2018 pipeline stands at USD5bn, making our AED7bn estimate fairly achievable. Our numbers do not account for any legacy receivables collection. Accordingly, every 10-day lower-than-expected receivables DOH p.a. would add c12% to our TP.