The contractor posted a Dh207.6 million loss attributable to its parent company for the second quarter of this year, citing “project cancellations and one-off additional provisions”, most of which related to work in Saudi Arabia. Revenue for the quarter also dropped by 37 per cent year-on-year to Dh805m.
A note from the auditor PwC accompanying DSI’s financial statements said it had a negative cash balance of almost Dh300m as of June 30. It said if the company’s management was unable to generate sufficient cash flow within the next 12 months, it “may not be able to meet its financial obligations when they fall due”.
The company had already breached the terms of one of its sukuk facilities but still managed to raise two new term loans during the six-month period of Dh151.2m, and its balance sheet shows a positive net equity position of Dh1.9bn as of June 30.
Nishit Lakhotia, the head of research at Securities & Investment Company Bahrain, does not believe that is enough. There is Dh1 billion of “unapproved change orders” billed on three contracts that the company has recognised as revenue but which has not yet been paid. DSI has said it believes these amounts “are fully recoverable”. It also pointed out that at least 80 per cent of past change orders on one of these contracts had previously been approved.
Mr Lakhotia said that the company cannot rule out the possibility of further write-downs against billed work in the future, especially given the current environment that contracts face in Saudi Arabia.
“They need to boost capital. The company’s equity has fallen below Dh2bn and the tangible equity is, in fact, below Dh1bn, while the company has [bank] debt of Dh2.4bn,” he said. “Ideally, they need a strategic investor, or a rights issue, or they need to raise convertible debt.”
But Mr Lakhotia said a rights issue may not prove to be popular with shareholders if it is too dilutive of existing holdings.
He has not set a profit forecast for the company because, he said, assessing margins given current conditions is difficult.
“On the bottom line there are so many things going on in terms of provisioning and the cost of contracts that you have no idea what the gross margins would be. A lot of contracts are legacy ones where they are barely making profit, if any.”
Sanlyak Manibhandu, the head of equities research at NBAD Securities, described DSI’s second-quarter result as “unpleasantly surprising”. His company revised its full-year forecast for DSI downwards to a net loss of Dh270m, compared with a net profit of Dh57m previously. It set a target price of Dh0.43, which is below the Dh0.52 per share the company’s shares closed at on Monday, representing a daily fall of almost 4 per cent.
Drake & Scull did not respond to a request from The National to comment.
mfahy@thenational.ae
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