Wednesday, 26 January 2011
In our latest post, “Saud” highlighted the political risk in Egypt and the buying opportunities created by the recent Egyptian stock market sell-off. Some really great companies are on sale, and I would be a buyer of Orascom Construction Industries (OCIC EY). OCIC is not only the largest listed construction contracting company in the MENA region, but also a major producer and exporter of fertilizers. The stock is down 6% since the outbreak of the Tunisian revolution, thus, creating an attractive entry-point. The weakness in the Egyptian Pound is yet another advantage for OCIC as costs are in Egyptian Pounds but revenues are mostly in stronger international currencies. Trading at EV/EBITDA multiples for 2011 and 2012 of 8.9x and 7.3x respectively, the company is decently valued for estimated EPS growth of over 100% from the end of 2009 to 2012.
OCIC has a strong balance sheet with no meaningful debt-outstanding until 2013. In addition, its hybrid exposure to fertilizers and construction is an ideal leverage on the global growth story. Fertilizer prices have been rising since June of 2010 and are expected to continue their upward surge as grain prices increase, the Chinese extend their high tariff period, and the market expects a bad crop in 2011. Moreover, there is a seasonality factor in play as the spring application season is at the door. In fact, Credit Suisse raised their price assumptions on fertilizers on January 14th. OCIC has a clear cost advantage in fertilizers as it benefits from low cost long-term gas contracts in Egypt and Algeria. These factors will contribute to a solid year for OCIC’s highly-lucrative fertilizer business.
The construction side of the business has been a drag in the short-term as the company’s backlog of contracts continued to decline. Please refer to the “Backlog Breakdown” below for greater details on OCIC’s major customers. Qatar alone accounts for 18.3% of the backlog, while Abu Dhabi stands at 15.2% and GCC Other stand at 3.6%. With the Qatar 2022 World Cup bid all sealed up, we expect more from Qatar. More importantly, I expect a substantial increase in contracts from the GCC on the back of surging oil prices. This is what drove the out-performance of OCIC in the 2007-2008 period and I expect a similar albeit less-pronounced pattern to emerge in the 2011-2012 period.