Galfar Engineering & Contracting (GECS.OM)

Galfar Engineering & ContractingCash conversion cycle stabilisingThe past years saw Galfar enjoying a significant working capital advantage; receivableswere collected ahead of payments to suppliers and subcontractors. The strong ties withthe government which Galfar had, presumably allowed the company to collect largeupfront payments. However, this advantage began to diminish in FY 08.Galfar's cash conversion cycle 2006-2012604642 40 42402620Days-(20)(16)(40)(60)(80)(61)2006 2007 2008 2009 2010E 2011E 2012ESource: Galfar, SHUAA CapitalReceivables past due up 88% in 2009 - A major concernReceivables pastdue deterioratingAs of 2009 year-end, Galfar had OMR 159.3mn of trade receivables, out of which 63.5% arepast due. The value of trade receivables with more than 270 days past due, amounts toOMR 28.4mn and17.8% of the total - a major concern in our view.The fact that the 270 day bracket increased by 88% YoY when revenues increased by arelatively low 13% is a major source of concern on the recoverability of this money. Giventhis deteriorating receivables position, we believe that it is highly likely that Galfar willbook impairments on receivables in the future. As a result, we have opted to address thisconcern in our four valuation scenarios, by discounting potential impairments directlyfrom the fair value. Our impairment assumptions range from OMR 10-28.4mn, dependingon scenario. More on this is available in our valuation section.March 18th, 2010 24