Damas International revealed a Dh1.9 billion (US$517.3 million) loss for the last financial year yesterday, one of largest ever for a public company in the UAE, as the jeweller sought to draw a line under a crisis in the boardroom. The company has struggled for the past year to come to terms with hundreds of millions of dirhams' worth of transactions made by its former management without the approval of shareholders.
Also at issue were about 2 tonnes of gold borrowed by the brothers Tawhid, Tawfique and Tamjid Abdullah, members of the company's founding family. The revelation of such big losses marked an attempt by the new board to spell out exactly how the company's finances have been hit and what it has to do to move forward. Damas, which is based in Dubai, said its underlying retail business continued to be profitable during the 12 months to March 31 this year but the losses stemmed from lower sales and Dh1.9bn in one-time write-offs.
"We've taken the loss, we would expect to recover going forward," said Nicholas Hegarty, a member of Damas's board of directors. The publicly listed company's revenues dropped 31 per cent in the 12 months to March this year amid a tough economic climate, yet its retail operations turned a Dh9.7m profit. But about Dh1.91bn in provisions pushed the company into the red. "It's [due to] general market conditions, which were … due to the financial crisis and the price of gold," said Mr Hegarty. "But also the early liquidity issues of the company that they encountered with the revelations of the Abdullah brothers' borrowings."
The one-time write-downs include Dh457m in money owed from the Abdullah brothers, out of a total of Dh606m still outstanding. The brothers originally signed a settlement agreement with Damas to repay the money over 18 months. But Mr Hegarty said the company was now aiming to sign a "cascade agreement" as a co-creditor with the other parties to which the brothers owe money. They aim to sign this repayment deal by the end of next month, alongside the debt restructuring deal with their banks. This would be a three-year agreement with the Abdullah brothers, enabling them to liquidate their assets in property at a higher price, said Mr Hegarty.
"We view it simply: if you force real estate sales in today's market you're not going to get the recoveries," he said. Analysts say Damas's rebound will lag as the price of gold continues rising and until consumers' appetite for luxury gold jewellery comes back. Cameron Alexander, a senior analyst at GFMS, a London-based precious metals consultancy, said Damas had a sound business but the tough economic environment would weigh on sales.
"It's a very strong name. I can't see them not trading out of this situation," Mr Alexander said. "But there may be some review of their operations and some downsizing to a certain extent. "Some operations will become unprofitable at a higher [gold] price level as sales dwindle. We may see some downsizing in the next six months." The former chief executive Tawhid Abdullah stepped down in October last year after disclosing to the board he had made "unauthorised transactions" worth Dh606m, including more than 50 deals, mainly in property.
The Dubai Financial Services Authority later conducted an investigation and levied record sanctions and fines on Damas and the Abdullah brothers for using company funds without proper shareholder approval. The transactions weighed heavily on Damas and thwarted the company's ability to meet gold loan obligations, forcing it to seek other forms of financing. The financial statements showed the move increased finance costs by about 72 per cent. Damas has since sought a standstill on its debt of more than Dh3bn owed to more than 20 banks and is finalising a debt restructuring deal with lenders.
"Excluding the provisions, the company's core business is profitable and continues to be profitable," said Mr Hegarty. "And we take comfort that the banks have extended the [debt] standstill not once or twice but three times, and we expect by the third quarter we will have a finalised restructuring with the bank in place and that will change the prospects of the company materially." Ghanem Nuseibeh, a partner at the investment advisory company Cornerstone Global and a senior analyst with Political Capital, said the Dh1.9bn loss would "be used in many studies to come as to what a lack of corporate governance and transparency can cost a company.
"It's a good sign that they acknowledge how big that loss is … It's part of a wider drive in Dubai to bring more transparency to its companies, even if they are not state-owned. Without better governance, a recovery will be difficult." email@example.com firstname.lastname@example.org