Structure

With an annual turnover in excess of $1bn and a market capitalisation of $451m, Galfar Engineering & Contracting is Oman’s largest contracting company. It has three main business units: oil and gas; civils and utilities and services (U&S); and roads and bridges.

The oil and gas unit was launched in 1988 and executes large engineering, procurement and construction (EPC) contracts. It includes a south Oman subsidiary, which was created to manage and execute the ongoing $975m Harweel Cluster Phase II facilities development project, a joint venture with the UK’s Petrofac.

The civils and U&S unit is the cornerstone of most of Galfar’s growth. It specialises in undertaking civil engineering projects. The third unit, roads and bridges, has built more than 1,500 kilometres of roads in Oman and Qatar.

Company Snapshot

Date established: 1972
Main business sectors: engineering, contracting and construction
Main business regions: GCC, India
Chief executive officer: Hans Erlings

Galfar also has a 52.2 per cent stake in the local Al-Khalij Heavy Equipment & Engineering, which leases construction equipment.

In October 2007, Galfar was listed on the Omani stock exchange, the Muscat Securities Market (MSM), following an initial public offering of shares the previous month, in which investors offered about 11 times the $156m that Galfar had sought to raise.

The listing was Oman’s second-largest initial public offering. Six shareholders hold 60 per cent of the equity: Sheikh Salim al-Araimi, its chairman, owns 17.9 per cent; Mohamed Ali, vice-chairman, owns 10 per cent; and four corporate shareholders – Al-Siraj Investment & Projects, Aimmar United Investment & Projects, PMA International and Qhassya Projects & Investment – own 32.2 per cent. The public holds the remaining 40 per cent.

Operations

Employing more than 25,000 staff, Galfar’s operations cover a range of construction services from oil and gas, to roads and bridges, to sewerage networks and desalination plants.

In 1999, Galfar was awarded the contract for the Salalah wastewater project, which marked the start of the company’s environment division within its civil works unit.

In 2008, it won the RO33m ($85m) contract to expand reservoirs and transmission facilities at the Barka desalination plant.

Galfar has also developed expertise in the installation of pipelines, turbines, power systems, steel structures and storage facilities. The oil and gas unit is responsible for construction of production and processing facilities, design and civil works, mechanical and electrical instrumentation and coating services, as well as electric power generation and transmission.

Key projects it has worked on include the Muscat Gateway monument and Oman’s upstream liquefied natural gas facilities at Saih Rawl and Barik.

The current project slate is dominated by the 54-kilometre-long Muscat Expressway road building project for Muscat Municipality, due for completion this year.

Ambitions

Galfar’s main objective is to ensure it maintains its market-leading position in the Omani construction market amid growing competition.

With the government rolling out a large capital expenditure plan of $4.4bn, the company aims to bolster its close relations with ministries and state-related organisations such as Petroleum Development Oman (PDO), which historically has accounted for 80 per cent of its orders. As part of its efforts to expand operations outside Oman, the company formed and registered a subsidiary in India in 2009, Galfar Engineering & Contracting (India).

The subsidiary was awarded a contract to construct the Indore-Ujjain road on a build, own, transfer basis through Mahakaleshwar Tollways, the company set up specifically for the project.

Galfar Engineering & Contracting

Galfar, one of Oman’s highest-profile companies, is facing a major challenge to its business model, and the next few years will reveal whether it has the capacity to maintain its position as the government’s contractor of first choice.

Recent investor ratings have been cautious about the company’s prospects, despite a $2.8bn government capital spending drive focused on key infrastructure and construction projects. In November 2009, Bahrain-based Sico Research assigned it a ‘negative’ short-term rating, saying it did not expect Galfar to win any major contracts in the short term and that weak third-quarter 2009 financial results might create selling pressure on the stock. This followed Credit Suisse coverage in September which gave Galfar an ‘underperform’ rating, saying it was cautious on the firm due to its geographical concentration and weakening prospects for growth.

There is also cause for concern about Galfar’s margins and order book. “The company is facing severe competition,” says Nishit Lakhotia, equity analyst at Sico. “Although there has not been a significant slowdown in contract awards in Oman, Galfar is not getting them, because of the very stiff competition, both from international firms and from other major domestic players within Oman.”

According to Sico, Galfar was awarded three new orders totalling RO41.8m ($124m) in the third quarter of 2009, taking its total new order awards during the first nine months to  RO101.1m ($262m). In November 2009, there was one order win, worth RO40m ($104m), for constructing the Ras al-Hadd airport runway.

The company may therefore need to become more aggressive in bidding for new contracts, but this is unlikely to help margins. Being aggressive may mean it will have to bid at much lower prices.

“At current levels the margins should definitely improve going forward as this very low-margin business model is not sustainable. You cannot operate at 1 or 2 per cent net margins. As an EPC contractor you need to maintain 6-8 per cent net margins,” says Lakhotia.

The decision to choose the Turkish-Greek based consortium for the Muscat International airport contract ahead of the Galfar-led consortium, came as a surprise. The official explanation, that the Turkish group was the best equipped for the airport project, is not totally convincing, as this type of project is Galfar’s bread and butter. The possibility that the government is looking to increase its stable of contractors is something that Galfar must address.

Galfar’s decision to buy materials in advance did not deliver them a significant advantage during the downturn. As prices declined subsequently, Galfar was denied the benefit of lower prices.

Galfar needs to win some big contracts in the first half of 2010. “They need to get more orders. They recently have won one major airport order at Ras al-Hadd, but overall the new order wins in 2009 are less than half of what they won in the previous two years,” says Lakhotia.

Things may improve. “Galfar’s margins are currently at such low levels that it will improve once the projects they are currently making a loss on are completed,” says Lakhotia.

Despite the challenges, the company has unparalleled experience in delivering large, technically challenging projects. One option to counteract the growing competition in Oman is overseas expansion. Its Indian operation is up and running and it has won a build, own, transfer road construction project there. The company could feasibly build a larger overseas presence and better insulate itself from over-reliance on the relatively small construction market in Oman.

Galfar Engineering & Contracting Profile