• 1Q16: Overall negative; contract awards are the main positive An overall weak set of 1Q16 results: i) net losses for the sixth consecutive quarter; ii) pressured working capital on a rise in payments to suppliers, coupled with continued slowdown in receivable collection; iii) increased leverage ratios (net-debt-to-equity at 0.44x up from 0.35x in December). On a positive note, gross profit was in the black for the first time in six quarters, benefiting from good execution levels, with revenue showing Y-o-Y growth and beating our estimate for the second consecutive quarter. We note, however, that the gross profit margin for Arabtec’s core business, construction, has continued to be in the red, with the margin support coming from other segments, including MEP and oil & gas. G&A continued to fall (-26% Y-o-Y), on the back of cost-cutting measures taken in 2H15. We expect to see further benefits through 2016, albeit at a slower rate, as confirmed by management. The most significant positive in the quarter lies in the new contracts secured, coming in at AED6.5bn, with a closing backlog, as of end of March 2016, of AED24bn (up 24.4% Q-o-Q).
• 2016: Another challenging year ahead despite strong awards YTD We acknowledge the strength seen in the contracts signed in 1Q16, and thus up our contract award estimates for 2016-19e. However, we have slashed our profit margin estimates, based on management’s guidance, to incorporate a more competitive environment that places pressure on the profitability of new contracts and potentially some cost overruns on various contracts in the existing backlog, especially given the slow trend of project execution. We lower our EBITDA margin by 510bps, on average, between 2016 and 2019.
• FV slightly tilted towards bear case on challenging outlook We maintain our Sell recommendation on a downside potential of 25%, while slightly upping our FV to AED1.13/share (up from AED1.07/share). We introduce bull-bear scenarios to accommodate various operating market conditions. Our bull case (FV: AED2.24/share) assumes stronger contract awards, faster project execution pace, higher project profitability and better receivable collection. Our bear case (FV: AED0.44/share) assumes bear market conditions to prevail, affecting operations negatively.

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