• Six-year low quarterly revenue; heavy operating and net losses Abdullah A. M. Al-Khodari Sons (Al-Khodari) published 2Q16 headline numbers, posting weak set of results. Revenue came in at SAR253mn (-37.4% Y-o-Y, -32.1% Q-o-Q, -27.8% vs. EFGe), with the weakness attributed to: i) negative variation orders; ii) slow projects’ execution; and iii) the reversal of revenue on the cancellation of Al-Taif project (SAR19.4mn). This has resulted in losses on the gross profit level (SAR31.8mn), operating losses (SAR44.2mn) and a net loss of SAR43.3mn. We note that the only positive point in the results is the continued reduction in operating costs, on reduced overheads and manpower costs, with indirect headcount down 30% in 2015.
• Weak awards and closing backlog number; await balance sheet and cash flow figures New awards continued to be weak in 2Q16 (SAR54mn), further pressuring backlog, a trend we have seen starting 2Q15. Backlog shrank for the sixth consecutive quarter, reaching SAR3.1bn in June 2016, vs. SAR5.0bn in June 2015 and SAR3.5bn in March 2016. It is worth noting that our model assume contract additions of SAR500mn in 2016e, which we will revise downwards given the negligible awards YTD. We await the release of the full financial statements to assess the quarter’s balance sheet and cash flow.
• Reiterate Sell; stock to underperform peers and general market We reiterate our concerns over: i) company’s inability to secure significant contract awards since 2Q15, with its backlog-to-revenue heading below the 2x mark; ii) execution challenges, with quarterly revenue recording its sixth consecutive Y-o-Y fall in 2Q16; iii) continued high leverage ratio (net debt-to-equity at 1.1x in March 2016 while June numbers are not yet released, however, we expect further pressure); and iv) rising unbilled receivables balance (107% to 1Q16 annualised revenue, 153% for total receivables). We note that the Saudi construction sector is not yet showing any signs of recovery, with: i) slow bidding (new awards: -58% Y-o-Y in 1H16, -61% Y-o-Y in June, according to MEED); ii) weak project execution; iii) tightening liquidity; and iv) rising financing costs, continuing to be the main themes.

Mai Attia
Sara Boutros