• 2Q16: Weak results; non-Kuwait operations continue to be a drag We estimate new awards to have totalled KWD37.1mn in 2Q16 (-23% Y-o-Y), coming at a total of cKWD85.0mn in 1H16 (+6% Y-o-Y). Revenue was weak, coming in at KWD56.3mn (-15% Y-o-Y, -19% Q-o-Q, EFGe: -16%), on weaker-than-expected project execution. Revenue from Kuwait was down 8% Y-o-Y, while that from other GCC markets slumped 25% Y-o-Y. 1H16 revenue was slightly down to KWD125.6mn in 1H16 (-1.6% Y-o-Y), with support coming from a strong 1Q16. Gross Profit Margin (GPM) averaged 4.8% in 2Q16 (2Q15: 6.9%, 1Q16: 3.3%) and 4.0% in 1H16 (1H15: 6.4%), with the company’s non-Kuwait operations continuing to be a drag and reporting losses on the gross level for the third consecutive quarter (2Q16: -4.7%, 1H16: -2.7%). Net income was KWD0.8mn in 2Q16 (2Q15: KWD1.5mn) and KWD0.22mn in 1H16 (1H15: KWD2.1mn).
• Cut FV 17% and downgrade rating to Sell We cut our FV 17% to KWD0.56/share (from an adjusted FV of KWD0.67/share, unadjusted: KWD0.74, following 10% stock dividends) to mainly capture the YTD weakness in net awards and the lower-than-expected profit margins in ex-Kuwait operations since 4Q15. More than 30% of CGC’s new awards in 2015-1H16 were secured from outside its home market, which we believe will continue to drag on margins. We lower our gross profit margin estimate for 2016-19e by c180bps to 5.2%. We also cut our new contract awards estimate for 2016 to KWD125mn on lower-than-expected awards YTD (KWD98mn). We expect CGC to report net losses in 2016-17e and net profit thereafter as the operating environment improves.
• Market price and FV reflect bear market conditions We introduce a bull-bear scenario analysis to assess how our FV would fare in different market conditions. Our bull case (FV: KWD1.30) assumes improved market conditions, triggering higher revenue growth, better margins and improved working capital management. Our bear case (FV: KWD0.23) assumes prevalence of oil price volatility, affecting government spending in Kuwait and Abu Dhabi and pressuring the tendering process, and, in turn, revenue growth and margins.

Sara Boutros
Mai Attia