Dubai: The Dubai shipping company Gulf Navigation has cleared a key part of its financial restructuring program, after receiving shareholders’ approval for a capital increase. Now, the company awaits an SCA (Securities & Commodities Authority) approval to get started on the process.
This is to be done through issuing 220 million ‘Mandatory Convertible Bonds’ (or sukuk) only to new shareholders. These will, after a one-year period, will convert to 200 million shares in Gulf Navigation.
The price of the convertible bond has been set at Dh1.1.
This is actually a second visit to existing shareholders by Gulf Navigation with the proposal. Following that meeting - where it had actually got shareholders to vote favourably - the regulator did not give its consent to the company’s plan of action. It pointed to the offer price of Dh1.1 while the Gulf Navigation stock was running at around Dh7 on DFM.
“Gulf Navigation had actually decided to go for the financial restructuring – through a capital reduction and then an increase through issuing new shares – well before the stock price had zoomed,” said a source. “At the time of the decision, the stock was at around 90 fils.”
The SCA then told the company to approach its shareholders for another approval, which is what it has got now. (The stock’s climb in recent times had much to do with speculation that a strategic investor was coming on board and inject new funds to see through an ambitious fleet expansion and overall company-wide restructure. In fact, the stock had been one of the high-fliers as the overall DFM Index turned in one of its best runs during the year-to-date.)
The process of final regulator approval is expected within days, upon which the company will start on the convertible bond issue.
A notable turnaround
Gulf Navigation’s been one of the big comebacks among UAE corporate entities in the recent past. Through 2020-21, it had been buffeted by setbacks and heavy losses, plus losing one ship at sea. The journey since then has been arduous, according to market sources.
Last year, the slow recovery was sighted, with quarters turning in signs of profitability. It was in the second-half of last year that the capital reduction plan had been mooted. (Among DFM-listed companies, Deyaar, the developer, was another that used capital reduction to be rid of legacy losses.)
“Listed developers in Dubai had garnered all the attention as the property market rebounded post-2021, and this was reflected in their stocks,” said an analyst. “Then came the banks with their record profits – but among all this, companies like Gulf Navigation had a compelling story to tell investors.
“A few more quarters of growth and the company can find itself operationally strong.”
Cost control measures, improving operating efficiencies, and continued efforts to enhance growth were responsible for the turnaround. The operating profit rocketed to Dh23 million from the previous year’s Dh4.5 million.
After reducing its capital base to tackle the accumulated losses of Dh637.69 million, GNC’s retained earnings increased to Dh6 million in H1-23. Thus, it successfully eliminated all accumulated losses, which accounted for nearly 66 per cent of the company’s capital in Q2-22.
The company also sold one of its petrochemical tankers - ‘Gulf Mishref – and using the proceeds to pay off some of its debt and improve liquidity. A large portion of the company’s debt has been converted into shares in the capital.
Outlook
The DFM index was led higher by stocks like GNC, which rallied sharply above their previous highs. Gulf Navigation’s stock gained 168 per cent in May and June after the management initiated an elaborate financial restructuring and enhanced liquidity.
This momentum of high trading volumes and share price growth continued well into this month, as the stock is trading around Dh6.96 – close to its highs. As per Bloomberg report, the stock’s total returns YTD stand at 405.08%.
The management is striving to lower financing costs and improve the performance of its vessels. The company is steadily overcoming complex challenges rising from supply chain disruptions caused by the pandemic.
However, it has a long way to go to improve its long-term growth prospects. Despite the upbeat financial performance, the company is trading at a price/sales multiple of 37.1x. This is significantly higher than its industry peers, suggesting the stock is overvalued.
- Vijay Valecha, Chief Investment Officer of Century Financial
