(MENAFN Press) Drake and Scull International (DSI) reported net income of AED37.6mn (EPS: AED0.016) in 1Q12 as compared to AED38.5mn (EPS: AED0.017) in 4Q11 and AED45.9mn (EPS: AED0.020) in 1Q11. Drop in cost of sales on a QoQ basis over and above the drop in revenue, the company was able to report a marginal drop in income.
This was largely due to higher MEP contracts completed by the Company which are generally higher than the other segments.
Reason cited by the company for the drop in income on a YoY basis was due to AED12.7mn (AED5.1mn provision on impairment of inventory, AED4mn additional provision for doubtful debts and AED3.6mn provision for fair value of investment) worth of provisions.
For 2Q12, Global Research estimates net income of AED48mn, higher by 27.7% on QoQ basis.
Diversification in newer markets paved the way for growth in backlog
Company was able to fetch AED1.33bn worth of new contracts during the quarter which were higher on a QoQ basis. Of the total new contract secured only one was in its local market i.e. Abu Dhabi worth AED127mn.
The remaining contractors were all in the new markets where DSI has expanded geographically. The highest one being AED845mn secured in Algeria in the Civil segment.
With these new contracts, the company was able to raise its backlog to AED7.7bn, higher on a QoQ & YoY basis by 8.5% and 2.7% respectively.
With higher number of new contracts being availed in the newer markets, the share of UAE dropped to 20.3% in 1Q12 compared to 28.8% in 1Q11.
Saudi Arabia continues to be the leading market for DSI, with backlog amounting to AED3.62bn (47.2% of the total).
Going forward for the 3Q12, we expect the backlog to drop in the back drop of seasonal effects of both summer and Ramadan.
Receivables dropped on a QoQ basis by 14.5% in 1Q12
With better cash and receivable management, the company was able to drop its trade receivables and retentions as well its prepayments & other receivables by 16.7% and 3.5% on a QoQ basis.
In the backdrop of higher revenue due to availing of higher backlog the company was also able to reduce the days receivables.
Trade receivables and retention days dropped from 206days in 1Q11 to 167days in 1Q12 while Prepayment and other receivables dropped from 47 days in 1Q11 to 40days in 1Q12.
We believe that in the near term, the company would be able to effectively manage its working capital requirements.
Nonetheless, in the long term, how effectively it is able to manage its working capital would remain the key for its future growth and expansion.
Valuation Update
The value of DSI's shares derived from the weighted average of the DCF and relative valuation methods is AED0.95/share.
The stock closed at AED0.82/share on the Dubai Financial Market at the end of trading on 29th July 2012, which implies that the weighted average value of DSI's shares is at a premium of 15.5% to the share's current market price.
At current price, DSI's shares are trading at a P/E multiple of 9.7x and 8.8x for 2012 and 2013 respectively.
We therefore recommend BUY on the Company.
