Saudi's Al Khodari: Capital raise will help us to bid for major projects

Saudi Arabian contractor Abdullah Abdul Mohsin Al-Khodari Sons (Al Khodari) has proposed a $102.6 million capital raising exercise

Image used for illustrative purpose. An Asian labourer works at the construction site of a building in Riyadh, Saudi Arabia August 2, 2016. Image used for illustrative purpose.

Image used for illustrative purpose. An Asian labourer works at the construction site of a building in Riyadh, Saudi Arabia August 2, 2016. Image used for illustrative purpose.

REUTERS/Faisal Al Nasser
The head of listed Saudi Arabian contractor Abdullah Abdul Mohsin Al-Khodari Sons (Al Khodari) has said that a proposed 385 million Saudi riyal ($102.6 million) capital raising exercise, which will see it swap outstanding debts for shares in the company, will leave it in a stronger position to bid for infrastructure work for major, new building programmes announced by the kingdom in recent weeks.

In a conference call with investors on Thursday evening, the company's chief executive, Fawwaz Al Khodari said that the deal "provides the company a lot more capacity in being able to take on more business... rather than being locked in with receivables that are taking time to come through, which naturally would limit capacity".

"With a number of major projects and mega-projects announced, it would be a shame to forgo that opportunity just because [of] the structure of the balance sheet," he said.

The company announced its debt-for-capital plans to the market on October 23 and appointed GIB Capital to advise on the deal. Some 250 million Saudi riyals worth of shares raised will be used to repay amounts owed by the company to its vendors, while the remaining 135 million Saudi riyals will be issued to its current majority shareholder, Abdullah Abdul Mohsin Al-Khodari Sons Holding, in return for the cancellation of an interest-free loan.

The company has yet to announce a price range for the offer, which will be subject to approval both by authorities and its own shareholders.

In response to an analysts' comment that the deal will dilute the holdings of current minority shareholders, the CEO said that the holding company's stake would also be diluted. It currently owns a majority (51.36 percent) share, according to the Saudi stock exchange, Tadawul, but this is likely to fall to a significant minority stake if the deal gets the green light.

"The fact that they [Al Khodari Holding] have given an interest-free loan to the company, and should they subscribe, that, in my opinion, is a positive indication that they are putting more skin in the game, they are more committed," he said.

Payments halted

Like many contractors in Saudi Arabia, Al Khodari has suffered over the past couple of years as a result of the government halting payments to contractors at the end of 2015 and putting a brake on new contract awards until the completion of its new Saudi Vision 2030 and its National Transformation Plan.

However, in recent weeks, the kingdom has announced a series of major new projects that will be led by the state-owned Public investment Fund (PIF). The biggest of these is Neom - a $500 million city that will be built on the Red Sea coast, but other schemes include a $4.8 billion redevelopment of Jeddah's corniche and the redevelopment of large areas of land close to the kingdom's two holy mosques in Makkah and Madinah.

"We're engaging to position ourselves to be an early beneficiary of the ambitious development projects announced by the government - one of them being, obviously, Neom, but there have been a few cities before that and some major projects that have yet to see the light," Al Khodari said.

"But we're positioning ourselves to see which ones really will have the true drive going forward earliest. Hopefully, we will be there at the very forefront." The company last week reported a 41 percent year-on-year decline in revenue to 111 million Saudi riyals due to the lack of new awards and the slow progress being made on existing contracts. It also declared a loss of 22.9 million Saudi riyals, but this was a 57 percent reduction on the 53.2 million Saudi riyal loss made in the same period last year. Its contracting backlog has also continued to shrink and stood at 2.6 billion Saudi riyals at the end of September, down from 4.6 billion Saudi riyals in the same period two years ago.

The CEO said that although the company's diversification into new areas such as oil and gas had taken longer than expected, he anticipates that the first awards in this field, and the recommencement of government projects in housing, would start to filter through early next year.

He said that the very large contracts recently announced would take longer to filter through, but that the company was focussing on "getting in early because we are an infrastructure contractor".

"Any infrastructure work to prepare those major developments, that usually comes at a very early stage and that's why it would be reasonable to assume some of that work will be in 2018," he said.

In an emailed statement to Zawya on Friday, Selima Mrabet, a financial analyst with Tunisian equities research company Alphamena, said that although the proposed debt-for-capital raising exercise would be dilutive for minority shareholders, it is "good for the company" as it will fund both working capital and capital expenditure requirements.

The company is facing "serious funding issues that can only be resolved by raising fresh cash", she added.

"I do not think it will be feasible to embark on mega projects with [its] current liquidity position. However, the capital increase, coupled with good cash collection from the government, can lead to a real recovery."

© ZAWYA 2017

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