AlembicHC likes diversification efforts of interior contractor Depa.
Diversifying abroad gives Depa a boost
Nothing boosts the status of a Dubai contractor these days like evidence that it is diversifying away from its home market.
Depa, which says it is the world's largest interior contractor, received a thumbs up yesterday from Alembic HC Securities, primarily because of its moves to grow outside the emirate.
The expansion includes the acquisition in August of Design Studio, an interior specialist in Singapore, for Dh295 million, giving the contractor a solid foothold in Asia.
The contractor's Dubai exposure dropped to 20 per cent last year from 84 per cent in 2006, the securities company noted in assigning Depa an overweight rating.
"Depa has managed to aggressively move away from Dubai," said Majed Azzam, the analyst who wrote the report.
He believes Depa shares, which trade on Nasdaq Dubai, have the potential to rise 36 per cent.
In comparing Depa to other UAE contractors, Mr Azzam found that the interior company and the engineering contractor Drake & Scull International (DSI) offer similar growth potential, "but DSI trades at a 60 per cent premium, which we believe is unjustified".
Alembic HC cut its rating on DSI to "neutral" from overweight, saying "fierce competition and tight liquidity raise concerns about margin compression and working capital deterioration".
Dubai contractors have been hurt by difficulties in getting paid for their work by struggling developers. But Mr Azzam believes that the collection risk is subsiding.
He believes Depa's exposure in Dubai will be limited in the future.
"We do believe there will be some issues here and there, but it won't be massive," he said. "They've already collected a lot of cash on work already done."
Alembic HC believes Depa's fundamentals are strong, including a "solid liquidity position".
Alembic HC also likes the spread of Depa's contracts over several sectors, with 51 per cent coming from hospitality projects, 26 per cent from residential and 9 per cent from infrastructure.
Depa shares on the dollar-denominated Nasdaq Dubai traded at 70 US cents yesterday, unchanged. The stock's recent high was 76 cents on November 10.