Wednesday, 9 March 2011 at 11:23, Reuters
Shuaa Capital downgraded Drake & Scull International PJSC to "hold" and cut its fair value on the stock by 21 per cent and said the Dubai contractor's backlog growth and expected future earnings remain overshadowed by rising regional risks.
The medium-to-high-risk-market exposure accounts for 13 per cent of Drake's backlog at the moment, but this could increase in the coming days, Shuaa said.
While Drake's operations span 16 countries, including 10 Middle East and North Africa (Mena) markets, Egypt and Oman account for the bulk of countries currently facing political uncertainty.
"The worst possible scenario for the company would be the start of material unrest in Saudi Arabia, Drake's single largest market," Shuaa said.
An uprising in Egypt that ousted President Hosni Mubarak, following one in Tunisia, ignited unrest across the Arab world, with the bloodiest in next-door Libya, where rebels are trying to end Muammar Gaddafi's 41-year rule.
Drake, which specialises in mechanical, engineering and plumbing businesses (MEP), offers the highest backlog/sales ratio within the brokerage's coverage space and the longest future earnings visibility. The company has a 2011 project backlog of Dh7.6 billion.
The brokerage, which previously had a "buy" rating on Drake, cut its fair value on the stock to Dh0.928 from Dh1.120.
Key risks include intensified political uncertainty spreading to higher-value Drake markets diminishing new contract awards and leading to major contract cancellations, Shuaa said. This could reduce its fair value on the stock to Dh0.49.
Shares of the company were up three per cent at Dh0.930 by 0700 GMT on Wednesday.
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