Costs hit Saudi power and telecoms company

What's Up: Look at sales for vanity and profits for sanity, as the old chief executives¿ saying goes, and that was never truer than for Al Babtain Power and Telecommunication Company, where strong revenue belies weak profit.

Look at sales for vanity and profits for sanity, as the old chief executives' saying goes, and that was never truer than for Al Babtain Power and Telecommunication Company, where strong revenue belies weak profit.

Al Babtain reported sales revenue for the fourth quarter last year of 267 million Saudi riyals, up 7.7 per cent compared with a year earlier.

Fourth-quarter profit stood at 16m riyals, up almost 70 per cent from the same quarter a year earlier but still nearly 30 per cent below Aljazira Capital analysts' expectations. Profitability for the full year dwindled 5.5 per cent to 74m riyals.

The main problem is higher-than-expected manufacturing costs and lower selling prices. The cost of goods sold as a percentage of sales rose from 79.1 per cent in 2010 to 84.5 per cent last year because of increased raw material prices.

In addition, competition is forcing Babtain to keep prices low. Gross margins fell to 15.5 per cent last year from 20.9 per cent a year earlier. Earnings were also dented by lacklustre performance in Egypt amid political instability in the country.

The company is diversifying.

In February, it acquired France's bankrupt Petitjean, a manufacturer of outdoor lighting and power transmission systems, one of Babtain's specialist areas.

It plans to self-finance the €7.35m purchase, restructure the company over the next two years, and expects the combined entity to generate 20 per cent higher sales.

However, Aljazira forecasts that earnings will register only muted growth in the near term and that margins may shrink after the integration.

The financial impact of the acquisition would be seen from 2015 onwards, it said. Aljazira has revised its rating of Babtain to "neutral".