Harvest season begins
Best play on the sector, upgrade TP on improving outlook. OC offers ideal exposure to the MENA construction sector, trading at a highly attractive 2020e EV/EBITDA and P/E of 0.5x and 3.8x, respectively, while offering a 2019-21e EPS CAGR of c14%. This comes on top of a lucrative 2020e dividend yield of 9.2%, stemming from a 2020e payout ratio of 35%. An upward revision of our 2020e assumptions (revenue and net income revised by c11% and c13%, respectively, on a 16% upward revision of 2019e awards intake) and improvement in CCC outlook up our TP for OC’s Nasdaq listing by c14% to USD10.5/share (7% for the EGX listing, on a stronger EGP).
Outstanding 9M19 award intake warrants an upward revision of 2019e awards. OC sealed cUSD2.8bn worth of contracts during 9M19, reaching our previous full year target five months ahead of year-end, boosted by Egypt’s USD900mn monorail. This, along with additional anticipated USD500mn awards in 4Q19e, takes our revised 2019e award intake to USD3.25bn, c70% of which is in Egypt. This positions OC as one of Egypt’s 2019 top contractors, with a c17% market share.
Expected liquidity release in 2020 provides further support to OC’s CCC. We see the CBE’s long-awaited release of liquidity to the market as key for Egypt’s construction sector. This should shorten the sector’s cash conversion cycle (CCC) by improving contractors’ cash collectability. Our numbers for OC assume a pick-up in FCF margin, reaching 5% by 2021e (up from -4% in 2017-18), on a dwindling working capital investment, now that sticky receivables are behind us, coupled with a higher quality backlog financed by international investment banks.
Results announcement main trigger for rerating, Besix’s sale offers upside. We view OC’s upcoming results announcement in 2020 as the main catalyst for the stock, closing its valuation gap with its peers. The ETA case, if resolved in favour of OC, would add 12% to our TP. Furthermore, a sale of Besix at 1.2x book, in line with OC’s current multiple, would add EGP13.00/share or c7% to our TP, all else constant. Conversely, every USD500mn miss to our awards estimate across our forecast horizon, on rising tensions in the region, would shave EGP15.00/share, or c9% of 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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