08-Aug-2017
Al-Khodari - 2Q17 results conference call takeaways
Rating: Sell
Target Price: SAR7.08
Closing Price: SAR9.67
Al-Khodari’s management held a conference call yesterday to discuss its 2Q17 results. The call was conducted by Fawwaz Al-Khodari (CEO) and Sohail Saeed (Finance department). Below are the main highlights from the call.
Difficult market conditions to continue in 2H17, improved outlook in early 2018
Management expects bidding activity to remain weak in 2H17 due to limited spending capacity on infrastructure projects in KSA; given the lack of sufficient liquidity to pay for new projects (as well as ongoing ones). Competition remains strong, on limited business activity. Recurring business (environmental and O&M) has helped Al Khodari’s financials, contributing the bulk of revenue in recent quarters. Market illiquidity was highlighted by management as the main challenge for the sector. Management is positive on the government’s initiative to settle private sector payments within 60 days of approved billing, as detailed in the government 2017 state budget. This would, in management’s view, be put into practice once the expected electronic billing system is activated.
Eyeing oil and gas and industrial sectors for potential business
Management indicated that it is eyeing new projects in the oil and gas and industrial sectors as well as new business from the private sector, as part of its diversification strategy, with expectations of landing a number of projects in early 2018. The National Transformation plan as detailed in government’s 2030 vision is expected to create opportunities in the private sector from 2018 onwards, which Al Khodari is targeting. Management has also indicated that activity in the housing segment is progressing steadily, with a lot of projects taking place, albeit at a slower-than-expected pace. Al Khodari plans to take part in these projects once they gain more momentum. Expanding into other countries is not on the table, while the planned rights issue is still on the shelf, given the tough market conditions and with the stock trading below par.
Al Khodari seeks to benefit from new government initiatives in the long term
These include: i) creation of the Contractors’ Authority under Ministry of Commerce & Industry: this has been formed – it will act as the market regulator with the aim to improve the level of professionalism within the contracting segment; ii) new procurement law, which will be in line with international best practices: expected to be issued before year-end; iii) National Project Management Office (NPMO): formed and progressing in setting the groundwork for project management best practices, with results expected in early 2018; and iv) White Land Tax initiative: this has triggered developments on land plots especially in major cities.
Little impact seen from implementation of VAT, with government contracts exempt
General Authority of Zakat & Tax (GAZT) has announced the implementation of VAT starting 1 January 2018. Management has noted that it sees limited impact from that, given that it will not apply to government contracts, which represents the majority of Al Khodari’s backlog. Going forward, it will be taken into consideration while pricing non-government contracts.
Sara Boutros
Mai Attia
Target Price: SAR7.08
Closing Price: SAR9.67
Al-Khodari’s management held a conference call yesterday to discuss its 2Q17 results. The call was conducted by Fawwaz Al-Khodari (CEO) and Sohail Saeed (Finance department). Below are the main highlights from the call.
Difficult market conditions to continue in 2H17, improved outlook in early 2018
Management expects bidding activity to remain weak in 2H17 due to limited spending capacity on infrastructure projects in KSA; given the lack of sufficient liquidity to pay for new projects (as well as ongoing ones). Competition remains strong, on limited business activity. Recurring business (environmental and O&M) has helped Al Khodari’s financials, contributing the bulk of revenue in recent quarters. Market illiquidity was highlighted by management as the main challenge for the sector. Management is positive on the government’s initiative to settle private sector payments within 60 days of approved billing, as detailed in the government 2017 state budget. This would, in management’s view, be put into practice once the expected electronic billing system is activated.
Eyeing oil and gas and industrial sectors for potential business
Management indicated that it is eyeing new projects in the oil and gas and industrial sectors as well as new business from the private sector, as part of its diversification strategy, with expectations of landing a number of projects in early 2018. The National Transformation plan as detailed in government’s 2030 vision is expected to create opportunities in the private sector from 2018 onwards, which Al Khodari is targeting. Management has also indicated that activity in the housing segment is progressing steadily, with a lot of projects taking place, albeit at a slower-than-expected pace. Al Khodari plans to take part in these projects once they gain more momentum. Expanding into other countries is not on the table, while the planned rights issue is still on the shelf, given the tough market conditions and with the stock trading below par.
Al Khodari seeks to benefit from new government initiatives in the long term
These include: i) creation of the Contractors’ Authority under Ministry of Commerce & Industry: this has been formed – it will act as the market regulator with the aim to improve the level of professionalism within the contracting segment; ii) new procurement law, which will be in line with international best practices: expected to be issued before year-end; iii) National Project Management Office (NPMO): formed and progressing in setting the groundwork for project management best practices, with results expected in early 2018; and iv) White Land Tax initiative: this has triggered developments on land plots especially in major cities.
Little impact seen from implementation of VAT, with government contracts exempt
General Authority of Zakat & Tax (GAZT) has announced the implementation of VAT starting 1 January 2018. Management has noted that it sees limited impact from that, given that it will not apply to government contracts, which represents the majority of Al Khodari’s backlog. Going forward, it will be taken into consideration while pricing non-government contracts.
Sara Boutros
Mai Attia