Galfar beats forecasts but is in for a struggle

Numbers add up to unpromising outlook for Omani contractor

Galfar Engineering's second-quarter profit of 2.4 million Omani rials (Dh22.8m) beat expectations but a number of loss-making projects, including the Muscat Expressway, have hurt the stock's performance so far this year. The Omani contractor reversed its first-quarter loss of 800,000 Omani rials but the results are still down 36 per cent against the second quarter last year.

"We were expecting increased construction activity to fuel a 6 per cent quarter-on-quarter growth in the second-quarter revenues, but the reported top line fell 10 per cent short of our 94m Omani rial estimate," said Roy Cherry, an analyst at Shuaa Capital in Dubai. "The gross profit margin landed 6.1 per cent higher quarter-on-quarter, slightly above our forecast but still well below the 'normal' level of 10 to 15 per cent."

This could be attributed to the declining - but nevertheless present - impact of loss-making projects. The 54km, six-lane project was launched in 2005, and the company said it was seeking reimbursement for some of its additional costs related to delays. Galfar also has the lowest ratio of backlogged projects to sales among its peers in the region, Mr Cherry said. So far this year, Galfar has secured 125m rials worth of contracts, primarily for government road projects.

"While the company beat our low expectations for the quarter, the bigger picture remains dominated by a backlog with an undisclosed baggage of loss-making projects, the lowest backlog-to-sales ratio among general contractors and thus the least future earnings visibility," Mr Cherry said. He said Galfar was also the most highly leveraged contractor he covered, with a debt-to-equity ratio of 124 per cent.

Mr Cherry maintains his "sell" recommendation on Galfar with a fair-value target of 0.39 Omani rials per share. The stock traded at 0.45 rials yesterday. [e-mail]