• Another quarter in the red; seventh in a row 2Q16 revenue was strong (AED2.2bn, +19.8% Y-o-Y, +11.2% Q-o-Q, EFGe: +19.7%; 1H16: AED4.1bn, +14.0% Y-o-Y) with the mobilisation of the projects secured in 1Q16 (including the Bahrain airport project), which we highlight was the main positive in the results. Gross profit was barely in the black, pressured by cAED100mn worth of cost-overruns (Q2 adjusted gross profit margin: 4.9%, unadjusted: 0.3%). This led to the seventh consecutive quarterly loss for Arabtec (AED186.4mn). Pressure on working capital remains, on the back of slower receivable collection. Leverage ratios were roughly unchanged sequentially, but we expect to see further pressure through 2016 with the closure of the agreement with Aabar and the secured funding for Bahrain International Airport, with TAV, after the closure of the quarter. Management had indicated that the AED400mn secured by Aabar has been received and has yet to be utilised.
• Cut forecasts due to weak margins, more cautious outlook in MT We cut our new contract awards assumptions by c11% in 2016-19e to cAED9.1bn, on average, per year, to account for a more cautious outlook for the sector, and adjust revenue in 2017-19e accordingly (-11%), while keeping our other underlying assumptions roughly unchanged. Management indicated that the operating environment remains difficult, with cost overruns and collection difficulties continuing on a number of legacy projects, but the recently-secured projects are progressing on schedule.
• Lower FV by 9%; weak profitability profile, 32% downside potential We do not expect Arabtec to report net income in the black for the coming three years, in light of the highly challenging operating environment, with cost overruns, slow project execution, intensified competition, weak receivable collection continuing to be the main themes. We reiterate our Sell rating with our new FV of AED1.03 (from AED1.13) implying 32% downside potential.

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