• Downgrade to Sell, as recent rally not backed by fundamentals Arabtec has rallied 44.7% this week (versus DFM: +5.2%) to reach its highest share price in four months. This was on the back of news related to Hassan Ismaik (the company’s former CEO) raising his stake to 11.91% (as of the end of the trading session on 29 March, unchanged on 1 March) up from 11.81% (on 28 March), and on speculation that Ismaik would continue to accumulate the stock. Our fair value of AED1.07, after the rally, implies 35% downside potential, hence, we downgrade our rating to Sell. Trading multiples are demanding, with a 2017e PER of 33.4x, and EV/EBITDA of 13.0x. We note that, with the exception of Arabtec and Drake & Scull International (DSI), stocks within our MENA contractors’ coverage have underperformed their corresponding general index, in line with our expectation. We believe both stocks will follow suit, as the market over-excitement fades away, thus we have Sell ratings on both names.
• Good start to 2016, but expected improved outlook for 2016 is already in our numbers  We note the company has had a good start for 2016, winning a AED2 billion contract from Aldar Properties. Our numbers incorporate AED4.5 billion in new awards for the year, up from an estimated AED2.8 billion in 2015. This is expected to result in 10% Y-o-Y revenue growth (-12% Y-o-Y in 2015), and push gross profit and EBITDA back in the black, supported by a more focused strategy and cost cutting benefits, after a year in the red, pressured by revenue adjustments.
• We await 2015 statements for balance sheet and cash flow developments  We await the release of the full statements to see the evolution of bank borrowings (+37% in 9M2015) and working capital management during the year. We expect the pressure on both to continue in the short-term, in light of the deterioration in the operating environment.

Mai Attia
Sara Boutros