GCC Construction Companies Downtrend Continues…

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1. Date : 26th April, 2017 GCC Construction Companies downtrend continues… Over the past decade, GCC enjoyed large fiscal surpluses and rapid economic growth mainly supported by thriving oil prices, which in turn deferred the development of other income-producing sectors and prolonged the implementation of fiscal reforms. With oil prices plunging, surpluses have turned into deficits, reserves have been redeemed and growth has decelerated. Middle East Contracts Awarded - Monthly (USD bn) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 With the new normal oil price range of USD45-60 per barrel, many countries across GCC have shelved unwanted projects and are time and again looking at only those projects which would be of use in diversifying their income. As a result of cut back on projects, most of the construction companies apart from some continue to remain in alarming situation because construction firms depend heavily on government business for their cash flow. To contain this issue, many companies have come up with recapitalization programs including and not limited to capital reduction, rights issues, selling their stake (bringing in new strategic investor) and offsetting of losses with reserves. Source: MEED In 2016, construction companies across GCC witnessed a further increase in their losses by 3% to USD1.22bn compared to USD1.18bn in 2015. Out of eight listed construction contractors in GCC, five are in losses while the ones in profit are either very well diversified (some business outside construction segment) or are mainly operating in a country which requires lesser oil price (i.e. below USD 50 per barrel) to breakeven their budgets. As a result of losses, the accumulated losses on their balance sheet have risen from USD 1.45bn in 2015 to USD 2.41bn as of 2016 and with rising accumulates losses, shareholders’ equity of the companies dropped by 64% to USD694mn compared to USD1.91bn last year. Receivables from customers, which is considered the backbone in this business, witnessed a slight drop in 2016, however, receivables as % of assets increased from 46.4% in 2015 to 49.4% in 2016. With companies facing various issues with recovery of their receivables, they continued to pile on further debt to fund the continuation of the projects. Debt obligations of the construction companies stood at USD2.97bn compared to USD2.71bn in 2015, growth of 9.5%. With drop in equity and rise in debt, debt to equity ratio rose from 1.4x in 2015 to 4.3x in 2016. Last but not the least, cash and bank balances of the construction companies were merely 0.9x of the equity and only 0.15x of the receivables at USD639mn at the end of 2016. With consensus estimates of oil price averaging below USD60 per barrel for 2017/18, we expect contractors to continue to remain under pressure over the next couple of years. The only way forward for the companies operating in this business is to either diversify their income sources or to focus their operations more in those countries which have ambitious plans of dealing with low oil prices or to carefully bid for contracts which come from financially strong developer so that their receivables issue remains under control. 1 P.O.BOX 1137, PC 111 – CPO, Sultanate of Oman l CR No. 1279406 l Tel: +968 2494 9000 l Fax: +968 2494 9099 l Email: info@u-capital.net l Web: www.u-capital.net
2. GCC Construction Companies – Financial Performance 2015/16 (USD mn) Net Income Gross Margins (%) Retained Earnings / Accumulated Losses Receivables 2015 2016 2015 2016 2015 2016 Arabtec, UAE (757) (957) -24.4% -11.5% (607) (1,266) 1,634 DSI, UAE (225) (200) -10.6% -11.2% (66) (270) 1,382 (84) (43) -69.0% -33.8% (954) (997) 11 9 (31) 7.5% -5.1% 77 38 175 (75) (28) 6.3% 6.8% 1 (27) 554 13 14 6.0% 5.7% 97 100 363 7 8 14.1% 10.8% 90 95 (74) 14 9.3% 18.7% (97) (85) (1,458) Al Mojil Group, KSA Al Khodari, KSA Galfar Engg., Oman CGC, Kuwait Nass Corp, Bahrain DEPA, UAE GCC Total (1,187) (1,222) 2015 Receivables to Assets (%) 2016 Equity Assets 2015 2016 2015 2016 1,392 46.4% 51.5% 916 (11) 3,523 1,365 62.8% 66.0% 592 376 11 6.7% 10.8% (620) 168 20.2% 22.7% 237 556 42.9% 44.2% 340 42.5% 39.8% 126 151 42.9% 334 359 49.2% (2,412) 4,578 4,343 46.4% 2015 2016 YTD 2017 2015 Debt 2016 Backlog Cash 2015 2016 2,704 476 622 4,932 287 2,201 2,068 661 716 2,207 110 (663) 162 106 483 484 NA 6 205 866 743 331 272 761 20 187 158 1,292 1,258 500 557 1,690 17 137 144 855 855 186 262 4,113 24 44.3% 148 153 293 341 5 4 NA 45 50.2% 318 331 678 715 70 55 525 131 49.4% 1,915 694 9,871 8,790 2,713 2,972 14,228 639 2016 2016 Source: Company Reports Price Performance of Companies - 2015/16/YTD 2017 40% 34% 21% 15% 20% 5% 2% 0% 0% 0% 0% -8% -20% -40% -60% -6% -13%-11% -16% -16% -18% -17% -31% -34% -55% Arabtec -3% -8% -54% -48% DSI Al Mojil Group Al Khodari -52% Galfar Engg. CGC Nass Corp. DEPA Source: Bloomberg 2 P.O.BOX 1137, PC 111 – CPO, Sultanate of Oman l CR No. 1279406 l Tel: +968 2494 9000 l Fax: +968 2494 9099 l Email: info@u-capital.net l Web: www.u-capital.net
3. Ubhar Capital SAOC (U Capital) Website: www.u-capital.net PO Box 1137 PC 111, Sultanate of Oman Tel: +968 2494 9000 Fax: +968 2494 9099 Email: research@u-capital.net Disclaimer: This report has been prepared by research department in Ubhar Capital SAOC (U Capital), and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such, and the bank accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. All opinions and estimates included in this document constitute U Capital’s Research department judgment as of the date of production of this report, and are subject to change without notice. This report may not be reproduced, distributed or published by any recipient for any purpose. 3 P.O.BOX 1137, PC 111 – CPO, Sultanate of Oman l CR No. 1279406 l Tel: +968 2494 9000 l Fax: +968 2494 9099 l Email: info@u-capital.net l Web: www.u-capital.net