• 2015: Overall weak operational performance In 2015 new awards fell by half to SAR1,505 million, ending the year with a backlog of SAR3.9 billion, the lowest level since 3Q2014. Gross profit margin fell 128bps Y-o-Y to 7.5%, on the back of weaker project execution (revenue: -10% Y-o-Y), cost overruns in a number of projects, and an adjustment to estimated costs on ongoing projects to accommodate the recent hike in energy and electricity costs. On a positive note, operating costs fell (-6% Y-o-Y, but more apparent in 4Q15: -32% Y-o-Y, -20% Q-o-Q), on lower manpower costs. The company ended the year with positive working capital due to less stringent payables terms rather than faster receivable collection, which has had a positive impact on its leverage ratios, but they still are relatively high versus its regional peers.
• Management sets the tone for a difficult year to come Management held a post-results conference call on 21 Jan 2016, and set the tone that 2016 would also be a challenging year operationally due to: i) a planned multi-sectoral reduction in spending patterns by the public sector, hitting capex spending on infrastructure, transport, education, and healthcare; ii) expectations of a continued general slowdown in industry spending; and iii) delayed payments by the government, pressuring balance sheet liquidity. For 2016, we forecast a 40% Y-o-Y drop in contract awards, revenue of SAR1,433 million (-8.7% Y-o-Y), margin pressure (GPM down 60bps) and net income of SAR26.3 million (-22% Y-o-Y).
• Stock set to underperform; maintain our Neutral rating We expect the stock to continue to underperform the general market, reflecting the challenges that the construction market is facing, along with increased fears on future contract awards in light of the higher volatility in oil prices and a potential cut in government spending. Moreover, we reiterate our concerns over a number of operational indicators including the company’s high leverage and the rising unbilled receivables balance, which might further drag the stock performance, in our view.

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