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Tabreed Q2 earnings growth fails to impress market

Recapitalisation and share dilution fears prevent positive reaction.

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Tabreed's quarterly results have not sparked fireworks on the DFM.
Tabreed's quarterly results have not sparked fireworks on the DFM.

The share price of the National Central Cooling Company (Tabreed) failed to respond to strong increases in Q2 revenue and net income, as a recapitalisation scheme and the prospect of share dilution dampened investor appetite.

Net income of the Abu Dhabi-based district cooling company rose to AED40.3 million, more than double the figure posted a year earlier. Revenue increased by 35% to AED247.7 million.

Tabreed attributed the strong performance to a growth in the core business of providing chilled water, resulting from more cooling plants coming online and an increased customer base.

In the second quarter, Tabreed added four plants to its fleet, bringing the total to 44, 10 more than a year earlier. Installed cooling capacity rose to 449,625 (gross) TR, from 352,100 TR a year ago.

“Our strategy has been to focus on the core business of chilled water, and these robust first half results reflect growth in the Company’s chilled water business and improved operational efficiencies,” said Sujit S. Parhar, Tabreed’s CEO.

But profits were also boosted by the revaluation of a convertible sukuk, which added a non-cash, non-operational gains of AED7.1 million to the profit margin. Without these gains, net profits for first six months of 2010 would have been up a mere 3% yoy, not the current 83%.

Share reduction

Tabreed is undergoing a restructuring programme, after having been hit by impairment charges in Q1. The company had to write down assets to the tune of AED1.16 billion, and had to take up a $354 million bailout loan from Abu Dhabi’s state investment vehicle Mubadala.

The company announced that the board approved a reduction of outstanding shares that would boost the share price above 1 dirham on the Dubai Financial Exchange, enabling it to carry out a rights issue in future. Under this plan, capital can be reduced by 80%, which amounts to AED790 million, or 970 million shares.

This 5:1 conversion would leave existing shareholder ownership proportions intact, and lead to a share price of around AED1.90, estimates the brokerage EFG Hermes.

“Completing our recapitalization program will give Tabreed the right balance sheet for growth, and today’s announcement towards the capital reduction is an important step in this process,” said Khaled Al Qubaisi, managing director at Tabreed.

Muted response

The stock market remained largely unimpressed by the growth figures. Shares on the Dubai Financial Exchange, closed at AED0.357 on August 10, the day the earnings were announced, only marginally higher than a day earlier, and well below the high of AED1,16 the shares were traded at in mid-October 2009.

“Given the severity of the impairment charges that the company announced at the beginning of the year and the subsequent recapitalisation proposed by the company, we believe that there is significant downside risk to the equity value of Tabreed,” wrote Abid Riaz, director at EFG Hermes, in a research note.

The loan provided by Mubadala also poses risk for shareholder value, he said. “With Mubadala, the company’s largest shareholder, providing short-term funding of AED1.3 billion in exchange for long-term capital, we believe existing shareholders will be diluted further. In our mind, questions also remain as to the state of the business post the proposed recapitalisation, and therefore we remain sellers of the stock.”

Tabreed currently owns and operates district cooling plants via wholly-owned joint-ventures and subsidiaries Bahrain, Kuwait, Oman, Qatar and Saudi Arabia.
 

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