• Deep losses for quarter on project cancellations, provisions New awards in 2Q were limited to one, worth AED227mn, bringing 1H16 total to AED570mn. Revenue was weak (AED806mn, -37% Y-o-Y, -22% Q-o-Q, EFGe: -20%) due to slow project execution, weak new awards and negative variation orders in Saudi Arabia and in other markets, pushing the quarter’s gross profit to the red (AED20mn). DSI booked a total of AED192mn worth of adjustments in 2Q16 (in the form of project cancellations, provisions and variation orders), resulting in net losses worth AED208mn in 2Q16 and AED198mn in 1H16. Balance sheet and working capital are still strained, with leverage ratios reaching record high levels and the poor receivables collection placing pressure on working capital.  
• Adjust forecasts to account for YTD weakness, more cautious outlook We adjust our numbers to account for the weaker-than-expected operational performance YTD and more cautious outlook in the medium term. The main changes include: i) c50% cut to our new award assumptions in 2016-19e to AED1.9bn per year on average; and ii) c30% cut to our revenue estimates in 2017-19e, as the expected relative weakness in new awards gets absorbed, and also on continued disruption of project execution, particularly in Saudi Arabia. We keep our gross profit margin assumptions fairly unchanged post 2017e, with support coming from the company’s selective bidding approach and its focus on non-civil, specialised segments, such as railway and oil & gas. DSI is expected to report losses in 2016e and to barely breakeven through 2019e, on our numbers. Further aggressive provisioning/balance sheet clean-up would push DSI’s net income into the red; a likely scenario, in our view.
• Cut FV on prolonged negative regional sector outlook; maintain Sell We cut our FV 17% to AED0.34, which implies a downside potential of 35%. Upside risks to our valuation include: i) receipt of the long-awaited approval and collection of the KAPSARC variation order by Aramaco; ii) securing the AED5bn Mecca railway project and/or other major awards in the railway space; and iii) closure of sale transactions of non-core assets, which may include its share in The One (the JV with Omniyat).

Mai Attia
Sara Boutros