Orascom Construction [ORAS]: On Solid Foundations
Raising our 12MPT to EGP215/share; OW/M maintained
Orascom Construction [ORAS]
Egypt / Industrials / Core Coverage Update
12MPT: EGP215
(was EGP146) set on 9 Apr. 2023
Investment Rating: Overweight | Risk Rating: Medium
An essential piece of Egypt’s construction boom puzzle in the last decade, Orascom Construction [ORAS] enjoys a robust business model that benefits from the country’s infrastructure spending and a stronger USD. This is apparent in ORAS's strong backlog and portfolio of projects that include Cairo’s Monorail, the Grand Egyptian Museum, and more. Moreover, ORAS tries to diversify its portfolio in other countries, including the US, Saudi Arabia, and Europe (either directly through ORAS or indirectly through its 50%-owned BESIX). We believe ORAS is currently traded at unjustifiably cheap multiples (2022a/2023e P/Es of 3.3x/3.5x) despite its solid earnings quality and stable dividend stream. We value ORAS at USD6.1/share (equivalent to EGP189/share) with a 12MPT of USD6.9/share (equivalent to EGP215/share), all based on an FX rate of EGP30.9/USD.
Concrete fundamentals with a solid balance sheet
ORAS had a strong year in 2022, having achieved USD113.5mn in earnings (including USD55.5mn in Q4 2022 alone) on revenues of USD4.2bn. Its backlog registered USD5.3bn, c.77% of which is denominated in foreign currencies, which makes ORAS a natural hedge against any further EGP weakness. Additionally, new awards reached USD3.4bn in 2022 (-20% y/y), further supporting top line growth with a diversified portfolio of projects. However, GPM narrowed to 8.3% in 2022 (-1.5pp y/y) due to rising USD-denominated costs, which we think should ease off in 2023 on the back of new legislation in Egypt allowing contractors to renegotiate their government-related contracts. ORAS’s fundamentals are also reinforced by a very strong net cash position of USD326mn at end of 2022, which represents 89% of its current market cap. Meanwhile, BESIX recorded a huge gain from its real estate segment, despite recording weak performance during 9M 2022. On the other hand, BESIX’s standalone backlog increased slightly by 1.4% y/y to USD2.8bn (based on a 50% stake).
We up our 12MPT to EGP215/share; reiterate our OW/M rating
Based on our discounted cash flow (DCF) model, we reached a fair value of USD6.1/share and a 12MPT of USD6.9/share (equivalent to EGP189/share and EGP215/share, respectively, based on an FX rate of EGP30.9/USD). According to our calculation, the higher valuation can be attributed mostly to the higher FX rate (EGP30.9/USD vs. EGP15.71/USD previously). Still, our new 12MPT of EGP215/share (47% higher than our previous 12MPT of EGP146/share) implies not-so-demanding 2022a/2023e P/Es of 7.1x and 7.6x, respectively, offering a potential triple-digit upside of 117%. Hence, we maintain our Overweight/Medium Risk rating for ORAS. We note that our valuation incorporates the worst-case scenario related to a dispute by Qatar Foundation, the owner of Sidra Medical Center in Qatar, against OHL, a 45%-owned subsidiary of ORAS. We also note that OHL had filed a counter claim against Qatar Foundation which was partially acknowledged. Notwithstanding this dispute, our 12MPT would be adjusted upward to EGP403/share.
Key catalysts
Strong backlog of government infrastructure projects. A diversified portfolio of projects (e.g. green hydrogen plants, infrastructure, power plants, and others). The new “Contractors Compensation Law” in Egypt allowing contractors to renegotiate their government-related contracts. A stronger USD.
Key risks
Sidra Medical Center lawsuit (our estimated charge of USD556mn, fully accounted for in our model). Continuation of the Russia-Ukraine war. Global recession fears.
For the full report, please click here.
Abdelkhalek Mohammed
Equity Analyst
T +202 3300 5717
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