Drake & Scull International (DSI) reported weak 2Q16 results. There was only one new award, worth AED227mn, bringing the 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 variation orders in Saudi Arabia and in other markets, pushing the quarter’s gross profit into the red. DSI booked a total of AED192mn worth of adjustments in 2Q16, project cancellations, provisions and variation orders, resulting in net losses of AED298mn in 2Q16 and AED198mn in 1H16. Balance sheet and working capital developments were weak, with leverage ratios reaching record levels and the poor receivable collections straining working capital.     Key negatives: - Weak awards for the quarter, with new awards limited to one contract, AED227mn for Zubail Oil Field Project in Iraq, bringing the total in 1H16 to AED570mn   - Backlog is down 29% Y-o-Y to AED9.4bn, heading towards the 2x (to revenue) mark, mainly due to project cancellations in KSA, according to management - Weak revenue (-37.3% Y-o-Y, -21.9% Q-o-Q, EFGe: -19.5%), coming in at AED805.5mn. 1H16 revenue was AED1.84bn (-23.4% Y-o-Y) - AED192mn worth of adjustments were booked in 2Q16, comprising of project cancellations, provisions and variation orders - Negative gross margin recorded in 2Q16, at -2.5% (2Q15: 7.7%, 1Q16: 7.2%). 1H16 was 3.0%, down from 8.4% in 2H15 - Net losses reported for the quarter were AED207.6mn (2Q15: AED10.2mn in net profit, 1Q16: AED9.8mn in net profit, EFGe: AED11.4mn in net loss). 1H16 net losses were AED197.8mn, versus AED35.4mn in net income for 1H15    - Poor receivable collection, straining working capital, likely mostly emerging from DSI’s exposure to the Saudi market - Bank borrowings continue to rise, with DSI’s net-debt-to-equity reaching 1.13x in June 2016, up from 0.55x in June 2015 and 0.95x in March 2016   We remain sellers of the name, with our FV implying 24% downside potential. (Company, Mai Attia, Sara Boutros)   Drake & Scull International (DU): AED0.54 as of 14 August, Rating: Sell, FV: AED0.41/share, MCap: USD336mn, DSI UH / DSI.DU