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|05 December, 2018

Drake & Scull picks up $163mln Reem Mall contract

DSI's shares have been suspended from Dubai Financial Market since November 15

Construction work is progressing on the $1.2 billion Reem Mall project in Abu Dhabi

Construction work is progressing on the $1.2 billion Reem Mall project in Abu Dhabi

Four Communications handout via Thomson Reuters Zawya

Dubai-based contractor Drake & Scull International (DSI) has announced that it has secured a 600 million United Arab Emirates dirham ($163.4 million) contract to deliver mechanical, electrical and plumbing (MEP) work for Reem Mall in Abu Dhabi.

The company, whose shares were suspended from trading by the Dubai Financial Market on November 15, said in a press release issued on Wednesday that it had been awarded the deal from the project's main contractor, Itinera-Ghantoot JV, which is a joint venture between Italian contractor Itinera and the UAE's Ghantoot.

Reem Mall is a 2.8 million square foot mall currently under construction at Reem Island in Abu Dhabi. It is being developed by Al Farwaniya Property Developments - a partnership between logistics firm Agility, its affiliate United Projects for Aviation Services Company (UPAC), and the National Real Estate Company (NREC). It is due for completion in 2020.

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DSI also said in the statement that it was “achieving progress on its ongoing comprehensive restructuring efforts”, citing the recent appointment of restructuring advisors and a plan to secure more 'carefully selected' projects in its home market.

The suspension of the company's shares came a day after it filed third quarter results which showed a 497.5 million dirham loss on negative revenue of 9.3 million dirhams for the quarter, and a loss for the nine-month period of 662.3 million dirhams on revenue of 1 billion dirhams (down 49 percent year-on-year), bringing accumulated losses up to 1.1 billion.

Last year, the company underwent a capital restructuring which saw three quarters of its share capital cancelled to extinguish 1.7 billion dirhams worth of prior losses.

The firm finished the nine-month period with liabilities outweighing equity by 401.4 million dirhams, but a vote taken by shareholders on October 4 overwhelmingly approved allowing the firm to continue to trade.

Ongoing losses at DSI have sparked a major sell-off in the company's shares, which declined in value by 83.6 percent between the start of 2018 and their suspension last month.

Despite such a decline in value, investors anticipating a value purchase may need to be wary. Issam Kassabieh, a senior financial analyst at Menacorp said that even once shares begin trading again, the company has "terrible fundamentals that wouldn't make sense from an investment point of view".

"Gross margins are negative, indicating that cost of sales are higher than the revenue brought in by the contracts themselves, which means the firm’s financial team is failing to either estimate contract costs appropriately or the firm is desperately trying to secure contracts regardless of the margin just to maintain their image and brand name," Kassabieh said in response to questions via email from Zawya.

He also warned that any new restructuring plan "could come in with a risk of ownership dilution and would require additional capital from the get-go".

He said that the firm had managed to reduce general and administrative costs, but added that "businesses aren’t built on cost cutting, they are built on securing value from core services".

In order for DSI to secure a sustainable future, he argued that it "would need to upscale operations, as do other firms in the UAE which are facing similar issues".

"My answer to this problem is mergers and acquisitions; inorganic growth would work better and investors are more likely to invest in a new brand rather than the same one that has failed them several times," Kassabieh said.

(Reporting by Michael Fahy; Editing by Anoop Menon)

(michael.fahy@refinitiv.com)

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