Drake & Scull is yet to come up with turnaround plot

Dubai - Only a fresh and immediate infusion of funds from its main shareholders is likely to revive the engineering services firm Drake & Scull International, after another harrowing week when it sacked its CEO and chief financial officer.

For now, the company’s day-to-day operations is managed by a three-member executive committee.

The latest move to remove its top two executives will have hardly reassured the local construction sector or DSI investors. More so, after the firm reported a whopping loss of Dh5.09 billion for 2018 after getting hit by a Dh1.39 billion loss the year before.

“The sackings only highlight the difficulty in coming up with a turnaround strategy — there are none available to pick up off-the-shelf,” said a source with close ties to DSI, whose shares have been suspended since November 15.

“Asset sales are not going to help much. In a market this depressed, even getting those asking prices will be difficult.

“Investors are still in the dark about how DSI could end up with a Dh5 billion loss. Is it because of risky investments in the past, the uncertainty in the construction sector now, or because of sheer mismanagement by the earlier teams?”

Over the last two years, market conditions too have not been favourable to companies involved in Dubai’s property sector.

In the past, Drake & Scull had wanted to extend its reach beyond MEP (mechanical, electrical and plumbing) works and be a fully fledged contractor. It even got into real estate development and had a joint venture with a leading local developer on a high-profile project.

Operational side issues

But once it started facing issues on its operational side, it decided to step back from all non-core interests, including real estate development. But the property market was then in decline, and meetings expectations on the exit price would have been difficult.

Plus, the delays in receiving payments on projects done has reportedly also added up.

There have been three CEOs at the company since April of last year, and the latest one had served only for three months.

Meanwhile, market and banking industry sources confirm that talks regarding such asset disposals had been going on for some time, but nothing substantial has come out of it.

Investors are still in the dark about how DSI could end up with a Dh5 billion loss. Is it because of risky investments in the past, the uncertainty in the construction sector now, or because of sheer mismanagement by the earlier teams?

- Source with close ties to DSI

Shareholders to the rescue?

Which leaves DSI having to look to fresh funds from its shareholders and a recapitalisation. Will its biggest shareholder, Tabarak Investment, come up with the goodies?

It’s current liabilities exceed its current assets by Dh4.74 billion (it was Dh855 million in 2017).

- Report

It had done so once before, in October 2017, pumping in Dh500 million at a time when DSI was starting to tilt under the weight of sustained operating losses and those on its investments.

At the time, the company said it would focus on its core area of MEP works rather than be a full-fledged construction business.

But as the 2018 numbers show, there was no stopping the spread of red ink across its operations. So much so, the latest report states without any hedging: “ … It’s current liabilities exceed its current assets by Dh4.74 billion (it was Dh855 million in 2017).”

Not just that, the report then goes on add: “These conditions indicate the existence of a material uncertainty that may cast significant doubts about the Group’s ability to continue as a going concern."

Adding “The Group may be unable to realise its assets and discharge its abilities in the normal course of business.”

Stark words and a warning likely to discourage even the most optimistic of turnaround investors.

Taking a cue from Arabtec’s turnaround

But there are some that DSI could still find a way out of this mess.

They point to the way Arabtec has seemingly done so after two difficult years during 2015-16 when it racked up billions in losses.

But with timely interventions by key shareholders and a trimming of costs across the board, the company then went on to report an attributable profit of Dh256 million for 2018, up from Dh123 million in 2017.

“Arabtec’s change in fortunes has set a marker, but the company’s operations also managed to pull off some major wins since 2017,” said a construction industry source.

“Given the nature of its work, DSI’s ticket sizes are not comparable; the company also needs to convince the construction sector that it can stay the course.”

Options

So, what can DSI try and sell off to get in some cash coming its way?

Its 2018 annual report lists 10 subsidiaries, the majority of which are wholly-owned. In Saudi Arabia, its stake is 59 per cent. (Last year, DSI “lost” administrative and operational control of its Qatar subsidiary, where it had held 100 per cent.) 

The 2018 report will have troubled its readers for other reasons as well.

The auditor says: “Revenue on certain contracts was recognised on values that are different from contract-stated values. We were not provided with the nature and supporting documents for variations or claims to the original contract values."

Adding "whether the same are approved or unapproved. Due to the unavailability of such information, it was not possible for us to determine the accuracy of the recognised revenue for the year.”

The company has issued a statement that an executive committee will oversee the daily operations until a new Group CEO is named. The shares remain suspended on the local exchange.

“From the outside, it looks as if patience is wearing thin when it comes to seeking a recovery plan,” said a construction industry source.

“Someone line Tawfiq Abu Soud had spent years in the company. The problem is that DSI has limited cash coming in from operating businesses and the losses are widening.”

“It takes a lot to end up with liabilities that outstrip assets by more than Dh4 billion — it would be great if the board comes up with why this happened,” a source said.

“And how a restructuring plan can actually work. Changing CEOs every other month is not the answer.”