• Downgrade to Sell following the recent unjustifiable stock rally We maintain our FV of AED0.29 and downgrade our rating to Sell, on the back of its stock rally (+32.7%) in the past four weeks; it has outperformed the general market (+7.2%). While we expect a relatively better outlook for 2016 (versus 2015), we believe the current market price factors in a rather unrealistic fast improvement for its 2016 operations, which we believe is unlikely, given the expected continued general weakness in the MENA construction sector, at least in the short term. We also note that: i) DSI’s contract awards for 2015 were the weakest since 2009; ii) its backlog hit its lowest levels since 2012 in December 2015; and iii) there have been no major award announcements YTD, which in our view, makes the scenario of a smoother (less rapid) recovery more likely. We highlight DSI’s elevated leverage levels, with its net debt-to-market cap at 2.9x (2015e).
• Improved outlook for 2016; not a major turnaround In 2015, DSI reported heavy losses (AED937 million net loss before minority). This loss can be mostly explained by AED984 million worth of revenue and gross profit adjustments booked in 3Q2015. Adjustments were made to account for uncertified variation orders, disputed extensions of time claims, accrued certified work, and one-off booked provisions related to ongoing arbitration and legal cases in the UAE and Saudi Arabia. We expect to see a return to profit in 2016, with the conclusion of the clean-up exercise, supported by the increased focus on its core operations (namely engineering business in the UAE) and the initiation of a cost-cutting programme that should improve operational efficiency.
• Four factors that would make us more positive A number of factors would lead us to become more positive on the stock. These include: i) the collection of the variation order for the Saudi KAPSARC project, suggesting an improved outlook for receivables collection; ii) oil prices reverting to an uptrend; hence, encouraging increased public sector expenditure amongst GCC governments and more contract awards; iii) a better outlook for the UAE property market translating into more contract awards; and iv) faster project execution.

Mai Attia
Sara Boutros