Arabtec and Drake & Scull make progress rebuilding balance sheets

The contracting firms Arabtec and Drake & Scull International (DSI) both announced on Tuesday that they had made progress in cleaning up their balance sheets. But they remain a risky investment for pot­ential shareholders, according to analysts.

“Both Arabtec and Drake & Scull are still in the middle of their organisational and capital restructuring,” said Nishit Lakhotia, the head of research at Bahrain-based Securities & Investment Company.

“That will take time. It will at least take another year,” he said.

He argued that in both cases minority shareholders have suffered from a dilution of their positions, but the fact that both firms now have powerful shareholders holding prominent stakes (Aabar Investments in Arabtec, and Tabarak Investment in Drake & Scull) meant that “their future should be better than what their immediate past has been in the last couple of years”.

“I think it’s wait and watch on both ends,” Mr Lakhotia said.

Allen Sandeep, the director of research at Cairo-based Naeem Holding, said the main challenge that remains for Drake & Scull will be collecting money owed to it for work done in Saudi Arabia.

“For Arabtec as well, questions still remain over their deconsolidated KSA exposure. For continuing operations, however, in both cases, the best way forward would be to venture further into areas still having higher barriers to entry, for example oil and gas.”

Sanyalak Manibhandu, the head of research at NBAD Securities, said that the industry still faces liquidity issues, and in the case of both contractors their push to become regional players has not helped in this regard.

“If you look at the problems with Qatar, even if it is still brief, it shows you the fault lines.”

He said the firms were good nat­ional contractors, “but if you are talking about regional contractors, the days where Arabtec or Drake & Scull can safely go across the GCC and make money in all of the markets, I think, is probably over.

“At the end of the day, each individual country is going to give their own contractor the biggest piece of the pie.”

He added that contractors who venture outside of their home markets often find themselves facing long payment delays.

Arabtec yesterday said it had gained approval for the first part of its recapitalisation – a Dh1.5 billion rights issue which has increase the size of its share base from 4.6 billion to 6.1 billion. The new shares are due to begin trading on the Dubai Financial Market today, subject to approval.

The company then plans to reduce the size of its capital base by just over 4.6 billion shares, reducing liabilities to help extinguish losses.

The firm said it would use the new money raised to help finish projects, support its turnaround plan and pursue growth opportunities.

DSI is planning to cancel 75 per cent of its shares to write off losses of Dh1.71bn. Once this is done, Tabarak Investment will subscribe to Dh500 million worth of new shares. It is likely to own a majority stake in the contractor post-investment.

Drake & Scull said yesterday that it had received approval from the Securities & Commodities Authority to begin final preparations for the share reduction, which is likely to take six to seven weeks to complete. It expects the investment to be finalised by the end of the third financial quarter.

Follow The National’s Business section on Twitter