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|23 May, 2018

Orascom Construction posts improved margins despite lower revenue

CEO Osama Bishai says company's US operations carry lower risks following substantial completion of fertiliser and methanol plant projects

An Orascom construction worker poses at Egypt's new administrative capital, approximately 45 km (30 miles) north of the current capital Cairo, Egypt October 18, 2017. Picture taken October 18, 2017.

An Orascom construction worker poses at Egypt's new administrative capital, approximately 45 km (30 miles) north of the current capital Cairo, Egypt October 18, 2017. Picture taken October 18, 2017.

REUTERS/Amr Abdallah Dalsh

Egypt's Orascom Construction announced a 14 percent year-on-year increase in first quarter profits on Tuesday to $31.9 million, despite a 29 percent decline in revenue to $756.8 million.

The company also reported a lower project backlog of $4.3 billion by the end of the quarter, as new awards fell to $332.9 million (although if its 50 percent share of Belgian contractor Besix is included, its consolidated backlog remained steady at $6.38 billion, and consolidated new awards grew year-on-year to $926.6 million).

In a statement accompanying the firm's results announcement, CEO Osama Bishai said that Orascom Construction was "on an exciting bidding platform in the Middle East and the United States, and have achieved a number of operational milestones in both geographical segments."

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It highlighted the sending of power to the grid from the 4,800 megawatt (MW) Burullus power plant in its home market of Egypt, which it said was one of the biggest power plants in the world. It also highlighted mechanical completion last month of the Natgasoline project in the United States, which is the biggest methanol production plant in the country.

Construction of the plant has proved problematic for the company, as had the huge fertiliser plant the company had built in the state of Iowa for its former parent company OCI NV, which completed last year.

Issues with both contracts have led to the company reporting weaker results over the past two years. The company declared overall net income of $78.5 million for its 2017 full year, but in terms of operating profit its MENA division (which mainly operates in Egypt) generated $252.7 million last year, while the US division lost $77 million. In 2016, its US operations lost $214 million.

In an interview with Zawya in Dubai on Monday ahead of its annual general meeting (the company's shares are jointly listed on Nasdaq Dubai and the Egyptian Exchange), Bishai argued that its US operations were in better shape.

"Commercially, or financially, the US has not been satisfactory in 2017, but from an execution point of view we are very happy that those mega-projects in the US are behind us," he said. "It eliminated our potential risk from the execution side."

Although the Natgasoline methanol production plant in Beaumont, Texas, is not yet commissioned, Bishai said that following mechanical completion "we are actually today in a position today where whatever stuff we are providing is on a reimbursable manner to the client. So we're almost out of the methanol business, too."

In the statement issued yesterday, Bishai said the company's optimisation efforts in the US "remain on track", and added that he expected "a pickup in new order activity" during the second quarter, especially after its Weitz subsidiary recently announced that it had won a second phase design-build project for a SkyTrain guideway system and maintenance depot at Phoenix Sky Harbor International Airport.

Christine Kalindjian, a research analyst at Arqaam Capital, told Zawya in a telephone interview on Tuesday that the company's first-quarter results were "in line with our estimates", with the reduced order book a result of the substantial completion of work in the US and the completion of two major power plants (including Burullus) in Egypt.

She said that Orascom Construction now has a "more sustainable", albeit smaller, backlog.

“We think the upside for the company's earnings is mainly coming from margin improvement and not from more top line (growth)," Kalindjian said.

(Reporting by Michael Fahy; Editing by Anoop Menon)

(michael.fahy@thomsonreuters.com)

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