Market analysis: Gulf contractors feel the squeeze

Contractors have suffered from cash-flow constraints as many government clients withhold payments as revenue decline due to lower oil prices. Delores Johnson / The National

The region’s listed contractors are expected to post another poor quarter of results as companies have to contend with a lack of new project awards, declining revenue and shrinking margins.

An analysts’ note from EFG Hermes says that company disclosures on contract wins show a 75 per cent year-on-year decline in new awards for the companies it covers, and that 70 per cent of the deals that were awarded in the past three months by value have gone to Egypt’s Orascom Construction.

It said that three companies – Arabtec, Al Khodari and Drake & Scull – had reported "close to nil" new awards over the past three months, and that revenue across the board was likely to be lower, with companies exposed to the Saudi market set for the steepest declines as payment issues continue to affect the market.

EFG Hermes’s analysts forecast a 13 per cent revenue decline for Dammam-based Al Khodari and a 22 per cent drop for Dubai-based Drake & Scull.

On Monday, Al Khodari said that it would book a multimillion riyal loss after gaining permission to reassign a contract with Taif Municipality worth almost 144 million Saudi riyals (Dh141m).

The company said it had gained approval from the municipality to reassign the work to Moenes Mohamad Al Shayeb Civil Works as part of its plan to deal with issues caused by labour market reforms and to reduce its reliance on government projects. It expects to book a loss of 19.4m riyals on the contract.

EFG Hermes also expects Arabtec, Drake & Scull and Kuwait’s Combined Group Contracting to post net losses during the quarter.

It forecasts a Dh83.2 million quarterly loss for Arabtec, which would be its seventh straight loss-making quarter.

Earlier this month, Arabtec said it would approach banks and shareholders for talks about improving its capital structure. Shareholders also approved a plan to transfer Dh1 billion from its reserves to wipe out accumulated losses, which stood at Dh2.27bn by the end of the first quarter.

EFG Hermes analysts also said that Drake & Scull’s appointment of a new chief financial officer and chief operating officer “may trigger another round of provisioning and balance sheet clean-up” when it announces its results and that short-term financing may need to grow. It predicts that the company’s net debt could edge up to Dh2.1bn – a 24 per cent year-on-year increase.

Contractors throughout the industry have suffered from cash-flow constraints as many government clients – particularly in Saudi Arabia – withhold payments as revenue declines due to lower oil prices.

A recent study by the consultants PwC on the effect of lower oil prices on the sector found that 80 per cent of respondents expect to experience funding restrictions in the near future, and that one third said they felt tighter funding would have a "severe" effect on projects.

Chris Scudamore, who leads PwC’s capital projects and infrastructure team in the Middle East, said that contractors need to make sure they maintain strong relationships with lenders.

“If you’re a contractor who has certain loans or finance in place, if things start to come under pressure, the first conversations you need to be having are with your bank about your credit facility.”

Speaking at the recent Meed Construction Leadership Summit in Dubai, Samer Khoury, the executive chairman of Consolidated Contractors Company, said that funding for contractors was still available, but only for certain purposes.

“As long as you ask for finance for projects, you can get it,” he said. “If you want to get it for the corporation, it will be more tough.”

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