Remain OW, despite dim US performance in 4Q17
Raise TP on margin upgrades, higher granted value to Besix. We raise our TP on OC’s Nasdaq listing by 8.5%, and EGX listing by 19.4%, to USD11.5/share and EGP203/share, respectively, the latter bolstered by a weaker EGP. The drivers are higher group margins, driving a 2017-19e EBITDA CAGR of 10%, and an improved cash cycle at Besix, valued at 1x P/B valuation, up from 0.7x. OC is cheap, trading on a 2018e EV/EBITDA of 4.4x, 50% below EM peers, and whilst its working capital drained 2017 cash flow, this should change in 2018, with OCI N.V. projects out the way. We expect DPS growth, yielding 5.6% in 2018 and 7.2% in 2019, and note that our base case TP accounts for: i) a falling backlog at a 2017-20e CAGR of 15% to cUSD3bn by 2020, and ii) full P&L charge of all US mechanic liens during 2018, implying a group EBITDA margin of 6.9% (8.6% ex the liens), up from 5.8% in 2017.
OCI N.V. exposure: One down, second imminent. IFCo was completed in 4Q17, and Natgasoline, the second OCI N.V. project, reached mechanical completion this month. We assume a full P&L hit of outstanding IFCo mechanic liens of USD53mn (USD50mn of which is a legal dispute, with the first hearing due in September 2018). The rise of additional claims on Natgasoline (4% of 2018e top line) is a source of risk; OC charged USD35mn on Natgasoline in 4Q17, citing this could be reversed (would add 1.4% to our TP). Third party work in the US (20% of OC’s 4Q17 backlog) is profitable, however, with management targeting 2-3% EBITDA margins (our 2018 estimate is 1.9%).
Big tickets offer upside. In 2017, OC’s new awards stood at USD2.2bn, c42% lower y-o-y, and 13% below our previous estimate. However, the contractor is vying for large infrastructure projects across Egypt, including a USD20bn nuclear plant, a USD10bn clean-coal power plant, and a USD3bn Sokhna-Alamein rail line, among others. In Saudi, further opportunity lies in the USD7bn Mecca metro. Every USD1bn addition to our 2018 new awards estimate of USD2.3bn would add 21% to our TP, all else constant.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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