EFG Hermes initiates coverage of Depa Limited with "Buy" rating

Buy Current Backlog and Cash, Rest is Free: We initiate coverage of Depa with a Buy rating and a fair
value (FV) of USD1.18 per share. At the current level, we estimate Depa is being valued on the free cash
flow expected to be generated from the execution of its current contracts and Letters of Understanding
(c73%, or USD0.39 per share) and net cash of USD0.15 per share (c27%). The stock trades at 2010e and
2011e P/E multiples of 5.1x and 4.2x while our fair value implies a 2010e P/E of 11.1x and 9.0x for 2011e.
These are both below the estimated peer average P/Es of 17.2x and 13.7x.
• A Bullish Fair Value on Conservative Assumptions: Our DCF-based FV of USD1.18 is broken down as
follows: i) 33%, or USD0.39 per share, relates to ongoing contracts and LOUs expected to be executed
between 2010e and 2013e, ii) 12%, or USD0.15 per share, to the net cash on hand, iii) 38%, or USD0.45
per share, relates to our forecasts of new contracts to be executed between 2014e-2020e, and iv) 17%, or
USD0.19 per share, to the perpetuity value. As we expect the 2:1 stock split and AED redenomination (to
be approved at its 15 March EGM) to improve the stock’s liquidity, we believe the time is ripe for entry.
• Dismissing Misperceptions: We believe the market is neglecting the favourable shift in Depa’s working
capital and cash conversion cycle, which is expected to fully bear fruit by 2012e, while heavily discounting
the stock due to its low liquidity and misperceived high exposure to Dubai. We believe that by
incorporating the anticipated change in contract/billing terms, reduction in receivables and hence
improvement of its cash conversion cycle, coupled with the underlying growth profile, our FV better
reflects Depa’s worth. Moreover, the company’s exposure to Dubai is declining with c67% of its backlog
being non-Dubai related and is expected to rise to 81% by 2013e. By function of being an interior and not
a pure-play contractor and hence exposed to the later leg of the cycle, coupled with increasing noncyclical
infrastructure and refurbishment work, Depa is poised to take on greater market share, in our view.
• Best-in-Class: We view Depa as a well-institutionalised company that is a clear market leader in a
fragmented interior contracting industry. A combination of its provision of comprehensive interior
solutions, well-rounded strategy, non capital-intensive business model, astute risk management policies
and exposure to high-growth regions/business segments, underpins our overall favourable stance. Its wellentrenched
network and impeccable track record should continue facilitating new contract awards.
• Supportive Sector Fundamentals: In terms of infrastructure and construction work, we estimate that
USD140 billion of projects across the MENA and South East Asia regions are due to be executed over the
next 5-8 years, pointing to the volume of potential project work. Additionally, new hotel fit-out and
refurbishment work is plenty, while rising wealth creation has spurred demand for yacht fit-outs. Overall,
we forecast 2010e-2013e revenue and earnings CAGRs of 21.8% and 28.3%, respectively. This growth will
likely be spread across Asia, Saudi Arabia, Abu Dhabi and other MENA markets.