• We raise our FV, yet maintain our Sell rating We raise our FV to AED0.41/share as we incorporate higher-than-previously-assumed new awards (+6.3% in 2016-19e) and higher average gross profit margins (+110 to 10.5%). Our FV implies downside potential of 29%; hence, we maintain our Sell rating. Our assumptions entail AED3 billion in new awards for 2016 (of which c10% has been secured YTD, unchanged Y-o-Y), flat revenue (AED4.1 billion) and improved profitability margins (GPM: 10.0%, EBITDA margin: 5.7%, net income: AED90.1 million), with the conclusion of the project clean-up exercise in 2015. The stock trades at 2016e PER of 15.2x, 10.1x for 2017e and EV/EBITDA of 14.1x for 2016e and 11.3x for 2017e.
• Market valuation implies too optimistic set of assumptions 2016 may carry positive surprises for DSI, which we believe the market has, highly optimistically, fully factored in as the likely scenario. These include: i) the long-awaited approval of the KAPSARC variation order by Aramco, which would, once collected, result in partial relief to DSI’s working capital and leverage position; ii) securing AED5 billion Mecca railway project, which DSI is competing on as part of a consortium, against two other consortia; iii) closure of sale transactions of non-core assets, which may include its share in The One (the JV with Omniyat).
• Our FV is biased towards bear scenario, on a bearish view on sector We introduce bull-bear scenarios to accommodate various operating market conditions. Our bull case (FV: AED1.51/share) assumes more aggressive pick-up in contract awards in the short term, faster project execution pace and higher project profitability. Our bear case (FV: AED0.19/share) assumes bear market conditions to prevail, with further cuts in government’s spending and slower receivable collection. Our FV is more inclined to the bear case scenario, given our bearish view on the operating environment, particularly in Saudi Arabia, where the bulk of the company’s work is (30% of backlog and revenue).

Mai Attia
Sara Boutros