• 2017: Losses to narrow as pressure from legacy projects ease We expect to see a slightly better 2017 for Arabtec, supported by: i) decent inflow of new awards in 2016 (9M16: AED7.6bn, 2016e: AED8.0bn); ii) higher representation from better-performing recently-awarded projects versus its troubled legacy projects, particularly in Saudi Arabia; and iii) better funding, which will boost project execution, with the drawdown of the latest two debt facilities (AED400mn debt facility from Aabar, earmarked for general purposes, and AED1.1bn facility, with TAV, to fund Bahrain airport project). That said, we do not expect this to prevent another year of losses on both the operating and net level, in light of the still-significant impact of legacy projects and their associated cost over-runs.
• Trim profitability margins on higher impact from legacy projects We raise our revenue assumptions by c26% in 2017-19e to reflect higher contract award assumptions (cAED10.2bn, on average, per year); and better outlook for execution. However, we cut our EBITDA margin forecasts for 2017-18 by c140bps, on average, as the pressure from legacy projects will continue to dominate with cost over-runs and/or negative variation orders. We note that a large portion of the current backlog includes projects that were awarded back in 2012-13, which might have a high probability of being completed at a net loss, in our view. Moreover, we expect diminishing benefits from its cost-cutting exercise going forward, with most measures likely to have already taken full effect. The net impact is a 20% cut in our FV to AED0.83/share.
• Remain sellers on a downside of 34% We continue to be sellers of Arabtec, with the company’s risk-reward profile skewed towards the downside, in our view. We see little room for positive surprises that would warrant an upgrade to our numbers. Prolonged periods of economic slowdown puts the sustainability of the assumed strong inflow of new awards at risk and hence its growth prospects. We also note that while Arabtec had concluded/divested out of most its Saudi projects (except for two), there could be further write-downs from Arabtec’s legacy projects be it from Saudi Arabia or the UAE in 2017.

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