Al Mal Capital Keeps ‘Outperform’ Rating on Drake & Scull

Drake & Scull said its consolidated second quarter profit reached Dh90 million, while its net profit for the first six months hit Dh168 million. The company disclosed its earnings to the Dubai bourse on Thursday.

The company also posted a quarter-on-quarter increase of 5 per cent in revenues at Dh512 million, bringing its consolidated net revenues in the first half to Dh1 billion. Earnings per share for the first six months was Dh0.08. “Drake & Scull reported good organic top line growth and better-than-expected margins. It has virtually negligible debt and a cash balance of over Dh1 billion from unused initial public offering (IPO) funds,” said Al Mal Capital in a note to clients. Al Mal Capital said that Gulf Technical Construction Company (GTCC), the civil contracting subsidiary of Drake & Scull continues to secure orders, and this will likely ensure a recurring revenue stream in the near-term.

While it is bullish about Drake & Scull’s growth prospects, Al Mal Capital said it will be more comfortable once the company shifts its focus from mechanical, electrical and plumbing (MEP) services which accounts for 48 per cent of its backlog - towards infrastructure, water and power (IWP) services which currently comprises 38 per cent of its backlog.

“Diversification will no only enhance its backlog mix, but also strengthen the long-term profile of the company. For the period from November 17 to June 30, the IWP segment had experienced the highest gross margin of 20 per cent, followed by MEP at 17.5 per cent and civil at 9.6 per cent,” said Mala Pancholia, equity research analyst at Al Mal Capital. A potential risk for Drake & Scull is its rising contracts receivables, said Pancholia. “We remain concerned about the 60 per cent rise in the outstanding contracts receivables for the quarter. Although the rising receivables is a trend across the board for all contractors due to deteriorating market conditions, Drake & Scull’s receivables have grown at a much faster pace than the payables. We adopt a cautious approach towards the near term stress on the cash conversion cycle, considering that IPO funds will not be used to relieve working capital strain.”

· rocel@khaleejtimes.com