EUR 26.48 For Business Accounts Only

ORAS EY | A deep value stock; Reiterate Overweight

A high quality name, trading at historical low valuation. OC’s current share price values the contractor at an unjustified 2021e EV/EBITDA of c1x (vs. 2.5x historical average), while assigning zero value to BESIX. We value the latter at 1x book (USD360mn), in line with global peers. We cut our TP by only c6%, post the COVID-19 pandemic, to EGP160/share, as the 1pp downward revision in our MENA margins assumptions, on higher forecasted operating costs and more challenging outlook, has been mostly offset by a pick-up in net cash balance to USD309mn (c59% of market cap). OC trades on a 2021e P/E of 3.5x, while offering a 2020-22e EPS CAGR of 21%, in addition to a 2020e and 2021e dividend yield of 6.7% and 11.4%, respectively.

Sizable, well-chosen backlog, offering high revenue visibility. OC’s last reported backlog stood at USD5.4bn, up from USD4.3bn in 2018, 82% of which in MEA seen delivering an EBITDA margin of 10-11%, with the balance located in US, with a 1.5% margin. This, to deliver cUSD3.3bn of revenues in 2020e and 2021e, translates into USD192mn and USD230mn of EBITDA in 2020e and 2021e, respectively. We see OC’s backlog dwindling to USD3bn by 2026, with USD2.5bn of new awards p.a., in line with the 2017-19 average, backed by the 2020-24e pipeline of projects in Egypt (total of USD175bn), underpinned by the infrastructure segment, as per MEED Projects.

BESIX: A hidden value, lost in ST headwinds. OC’s 50% stake in the Belgian contractor, running a USD5bn backlog, is recorded using equity method, amounting to USD360mn, as of 2Q20 (cEGP50.0/share). Over 2016-19, BESIX contributed to cUSD50mn p.a. to OC’s bottom line. Provisions and cost overruns related to a couple of projects translated into net losses of USD21mn, on OC’s P&L over 4Q19-2Q20. With the aforementioned projects nearing completion, we expect BESIX to turn profitable in 2H20, delivering USD30mn and USD41mn share of income in 2021 and 2022.

Improving FCF generation, underpinning lucrative yield. A stringent WC management, along with an improvement in liquidity, has fostered OC’s CF generation profile, bringing 2Q20 CCC to -60 days vs. -29 days in 2018, and net cash balance to USD309mn vs. USD29mn in 2018. We expect this trend is here to stay, resulting in 14% and 17% FCFE yields in 2020 and 2021, respectively, underpinning our dividends assumption.