EUR 69.62 For Business Accounts Only

Reinitiate with Neutral; Receivables collection uncertain

Full P&L recovery around the corner, receivables the next leg. Arabtec was profitable for the fourth consecutive quarter in 4Q17, and with AED17.2bn in backlog, 2x billings. As zero-margin legacy projects (estimated at c25% of backlog) are progressively phased out by 3Q19, we foresee a 2017-19 EBITDA CAGR of 26%. A major shortcoming of 2017, though, was that working capital left operating cash flow negative. For us, Arabtec will be cleared once claims and aged receivables are settled, which is a hard call to make, given the UAE’s contracting industry has historically suffered on this front.

A foundation in place. Arabtec’s fairly new management targets AED8-9bn of awards p.a. vs. AED7.7bn in 2017e. Although the company is gaining local market share, we expect a flat 2018-20 top line, on the back of dwindling demand in the UAE’s residential and mixed-use market. However, excluding legacy backlog, we calculate that Arabtec generated an EBITDA margin of 5.5% during 2017e, making our 2018 and 2019 estimates of 4.4% and 5.4%, respectively, and, in turn, our 2017-19 EBITDA CAGR, fairly achievable. Supporting our margin outlook is management’s new stringent approach to bidding, via: i) selectivity, ii) self-performance, and iii) lump sum contract pricing, with strong cost estimation.

Cash generation next in store. Management views improved cash flow generation as part of its 2017-19 strategic roadmap. Arabtec’s 2017 cash cycle came in at 10 days (seen as sustainable) vs. 68 days in 2011-2016, leading to working capital to sales of 8% in 2018-20 vs. 21% in 2011-16. Consequently, FCF generation picks up, yielding 7% in 2018, vs. -44% in 2017, and rising to an average of 11% over 2019-20, but we believe this is priced-in at 2018e and 2019e EV/EBITDA multiples of 11.1x and 8.7x, respectively.