• 1Q16: Overall weak, particularly working capital and new awards DSI reported its financial results for 1Q16. Revenue was weak (-7% Y-o-Y, -25% Q-o-Q), coming in at AED1.03bn, albeit in line with our estimate of AED1.02bn (-8.6% consensus estimate). Gross profit margin was decent at 7.2%, driven by its engineering business and EBITDA was in the black, at AED29.5mn. Net income was AED9.8mn (-61% Y-o-Y, +105% Q-o-Q, -51% vs. EFGe, -55% Bloomberg consensus estimate), supported by AED14.3mn in other income (1Q15: AED7mn), excluding which, net income would have been in the red. Receivable collection issues continued, which we attribute to the company’s high exposure to the Saudi market. Bank borrowings continue to rise, with DSI’s net-debt-to-equity inching up to 0.95x (0.91x in December). DSI signed a single contract during the quarter - an AED343mn contract for Doha Metro. Backlog as of end of March dropped 18% Y-o-Y to AED11.3bn.
• Management: Selective in KSA; austerity measures to continue Management shed some light on 2016 outlook and strategy: i) Saudi Arabia (c30% of backlog) continues to be a “critical market”; yet, DSI will be selective in bidding (limited to AED5bn Mecca railway project, expected award date according to MEED: August 2016); ii) continue with austerity drive to streamline costs and reduce S&G; iii) improve balance sheet liquidity; and iv) strengthen operations and increase efficiencies, with the appointment of a new COO and new CFO.
• Maintain Sell; positive surprises mostly factored in the stock price We maintain our FV at AED0.41/share and maintain our Sell recommendation, on a downside potential of 27%. The market is discounting an optimistic set of results, possibly related to: i) full/partial collection of KAPSARC variation order by Aramco; ii) securing AED5bn Mecca railway project; and iii) closure of sale transactions of non-core assets, which may push DSI’s net income into a positive territory.

Mai Attia
Sara Boutros