Galfar Engineering & Contracting (GECS.OM)

Galfar Engineering & ContractingWe expect Galfar's bottom line to witness a gradual improvement over the comingyears as margins recover from their 2009 lows despite declining revenues. While we areprojecting revenues to decline by 8.6% and 2.9% in FY 10 and FY 11 respectively on theback of backlog depletion, net profits are expected to grow by around 3.6x in FY 10 anda further 41.0% YoY growth in FY 11 to reach OMR 13.8mn and OMR 19.4mn respectively.This discrepancy between top-line decline and bottom-line growth is mainly a result ofa GPM recovery coupled with our expectation of stable SG&A expenses offsetting thedecline in revenues.The net profit margin (NPM) expansion is expected to be slower than that of the GPM andEBITDA due to the relatively high net interest expense - leading it to land on 3.7% and5.3% in FY 10 and FY 11 respectively by adding 274 bps and 166 bps YoY.High net debt, most leveraged contractor in the regionNet debt of OMR0.31/shareAs of FY 09-end, Galfar held OMR 4.56mn in cash and cash equivalents against which thecompany had OMR 98.5mn in debt. As a result, the net debt position was OMR 94mn,equivalent to OMR 0.31 per share.604020-Galfar's cash and debt 2006-20121318 145 52137OMR mn(20)(40)(23)(60)(37)(36) (55)(42)(80)(65)(100)(84)(79)(89) (86)(93) (99) (94)(120)(108)2006 2007 2008 2009 2010E 2011E 2012EDebt Cash Net cash (debt)Source: Galfar, SHUAA CapitalTotal debt-to-equity reached 120% as of FY09-end, almost inline with FY 08 leverage ratioof 129%. Consequently, Galfar is the most leveraged contractor in our coverage universe.Key contractors' net cash (debt) and leverageCompanyNet cash (debt) Debt-to-Equityper share (USD)Arabtec Holding (0.07) 35%Drake & Scull International 0.10 32%Mohammad Al Mojil (0.88) 25%Galfar Engineering (0.81) 120%Source: SHUAA Capital, Company reportsCash, debt and equity figures corresponds to the last reported figuresMarch 18th, 2010 23