Auditor warns on Drake & Scull’s future as contractor breaches terms of bank loans

The company's new chief executive is attempting to turn Drake & Skull around after it posted a Dh732.9m loss last year.

Drake & Scull International’s chairman Majed Al Ghurair has said the company will focus on “strengthening our capital structure and reducing our leverage level” after the contractor reported a loss of Dh732.9 million and confirmed it was in breach of banking covenants.

It finished the year with a negative cash balance of Dh305m, according to newly filed accounts.

The company’s auditor, PwC, warned that a “material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern”.

A conditional waiver with its lenders that was in place following a breach of its banking covenants has now ended because the company was unable to comply with reporting requirements, the document showed. This means that its lenders can technically recall loans on demand.

A letter to shareholders from Mr Al Ghurair stated that the company was “confident that the strength of our business model, the changes we have made to our management and the renewed focus on our clients and our operational excellence” would allow it to overcome current market conditions and deliver its backlog.

Drake & Scull is in the midst of attempting a turnaround under Wael Allan, its new chief executive who joined the company in October.

His plan involves cutting back from civil contracting outside the UAE, and exiting other markets, such as India, where it is not among the top contractors in the mechanical, engineering and plumbing sector.

Last month, the company announced plans to raise up to Dh500m through a capital-raising exercise, stating it had received undertakings from Dubai-based Tabarak Investment for a Dh500m investment.

It is also attempting to generate cash through the sale of non-core assets. Last week, it sold its 50 per cent share of the luxury One Palm Jumeirah to its joint-venture partner, Omniyat, for Dh308m.

Allen Sandeep, head of research at Egyptian investment bank Naeem Holding, said that a recapitalisation, in a similar style to the one currently underway at Arabtec Holding, was necessary.

“But the problem here would be the price. It is trading at less than 50 per cent of its par value. Now, if they are going to privately place Dh500m worth of shares, how much is that Dh500m going to represent in terms of the valuation? We don’t know yet.”

Drake & Scull’s shares finished trading unchanged yesterday at 44.6 fils per share.

The company’s accounts show that it has written off the entire value of an investment in an associate, which is understood to be its portion of the Lamar Towers project on Jeddah’s corniche, where it was the main contractor.

It has also written Dh29.5m off the value of its civil contracting business, Gulf Technical Construction Company, via a goodwill impairment. It was valued at Dh110.7m, while the entire amount of goodwill on the company’s books was currently Dh815m – a significant portion of its net equity position of Dh1.25bn.

“For me, the concern to some extent is that they still have more than Dh800m of goodwill,” said Nishit Lakhotia, an analyst with Bahrain-based Securities & Investment Company.

“They listed in the UAE, mostly bought their related entities across the region and now they are impairing goodwill, which is a concern.”

He believes the company has acted in a similar manner to Arabtec by carrying out a significant amount of provisioning in the final quarter of last year, with a view to presenting a cleaner balance sheet in future.

“Both of these firms have significant backlogs, so that is definitely a positive. The only issue is how much money they can make out of these projects, and how they survive the current strain in their balance sheets and tight liquid­ity.”

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