Today’s Trading Playbook
KEY THEMES
This morning, Orascom Construction [ORAS] has released its full year 2020 results. Despite a 25% drop in bottom line, revenue growth came in mid-single digit. Resilient topline performance came on the back of improvement regarding US performance, as revenues for US increased 26% y/y contributing 37% of company's revenues. An important good sign was US segment P&L showed a turn to profitability with USD9.3mn in net income compared to a net loss of USD17.5mn in 2019. Moreover, ORAS’s investment BESIX -which 50% owned- distributed a cash dividend of EUR10mn to ORAS despite its loss of USD6.2mn, backed by a recovery seen during the second half of 2020. We note that management has proposed distributing a cash dividend of USD0.23/share implying a dividend yield of 4%. We continue to see ORAS as considerably undervalued, currently trading at 2020 P/E of 7.4x and EV/EBITDA of 1.8x. ORAS may not be a market favorite right now, given the obstacles facing major contractors, in addition to couple of potential legal claims that represent an overhang. However, we believe once the market is able to deal with the elephant in the room, the obvious undervaluation in ORAS will be an important tailwind for future upward re-rating.
Elsewhere, the tug of war in oil prices continues, with WTI crude prices below the USD60/bbl mark. This comes despite the cargo ship which had stuck, blocking crude oil carriers in the Suez Canal since Tuesday. Oil prices decline again is a response to renewed fear of major lockdowns in many of developed counties, particularly in Europe, will delay demand recovery in fuel-related products. The important takeaway here is that we’re witnessing a sentiment shift. Contrary to the majority of Q1 2020, oil prices are now more responsive to demand concerns, negating the effect of different supply curbs.
Positive
ORAS: Despite annual drop in profitability, we believe ORAS is considerably undervalued, given the scope of its future operations.
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