Monday, May 10, 2010

Gulf Finance House - 1Q10 US$7.5 Million Loss

GFH has posted press releases on 1Q10.   English language here.   Arabic here.

And summary financials here.

Hard to do an in-depth analysis based on a one page "newspaper" announcement.

Nonetheless, some preliminary comments.

GFH's liability restructuring defused an imminent threat, but only "just". Of the US$180 million restructured, US$120 million comes due this year. US$100 million in August and US$20 million one month later.

Barring an asset sale miracle, it's probably likely that these amounts - or substantially all of them  - are going to have  rescheduled.

But that's really only a small part of GFH's problems.  The central issue for GFH still remains whether its  "proven business model" can generate sufficient cash to pay the light bills.   Debt repayments can be stretched out, but if you can't make the operating expenses it's very difficult to continue in business.

Based on 1Q10 numbers, it's hard to be optimistic.

A very quick and admittedly crude estimate is that GFH has a quarterly minimum cashburn rate of  somewhere around US$ 12 million to US$15 million before other cash drains, e.g.,  customer deposit withdrawals, repayment of interbank deposits, project funding, etc.   GFH's ending "cash" at 31 March 2009 was US$21.5 million.

While it's early in the hoped for turnaround, so far cash income generation is still lagging.  In 1Q10, cash operating income was roughly one-third of the declared US$18.5 million in accrual income.  Less than 50% of the minimum estimated cash burn.  Only a "timely" sale of Investment Securities (US$21.l2 million) saved the cash position which was US$21.3 million at 31 March 2010 as per the Cashflow statement.

Apropos of Ted Pretty's comment about new products, one has to ask what products customers are going to be comfortable buying from it.  Will they be willing to give GFH money today for products to be delivered in the future?  Would the Central Bank be wise to approve GFH selling such products?  If not, then the deals have to be spot - customer cash against an existing asset.  That will require a lot of volume to generate significant profit.  Can GFH move US$100 to US$200 million in product?  What sort of margins can it generate on such sales in this environment?  And with its own name a bit tarnished?

So it appears that asset conversion not income is the key in the near term - probably the rest of 2010 and perhaps the early part of 2011.  

So let's take a look at some of the sources and uses of cash.
  1. Placements - Shown as US$156.7 million with Cash of US$5.4 million.  Looks like comfortable  liquidity.  But roughly $140 million of these are pledged for projects so liquidity is weaker than  it  appears. That pledge was disclosed in Fiscal 2009 financials.  And you get a hint here in the 1Q10 Cashflow statement - where only US$16 million of Placements are considered "cash".  Without the 2009 note, you wouldn't know if that's due to tenor or because they're pledged.   
  2. Investment Banking Receivable - No change since 31 Dec 2009.  This bears watching for timing and probability of collection.  GFH had written roughly half of the IBR off during 2009.
  3. Other Assets -  Recall that roughly US$188.3 million of this is project costs funded.  So return of principal is dependent on sale of the projects.  Assuming the best regarding ultimate value, probably not a likely near term event.  This category also ties back to the Placements.  If GFH can extract itself from future obligations to fund, then US$140 million or some portion of Placements could become liquid.  But might that risk the US$188.3 million already invested and carried here? 
  4. Investors' Funds are down roughly US$50 million.  The Cashflow appears to only account for US$29 million.  Hopefully the notes will explain.  The question here is whether customers are withdrawing funds - which could add another cash drain burden.
In this context it's hard for me to understand the continuing conversion of the murabaha.  I really don't see an economic rationale.  One thing that does occur to me is that this is a device to provide equity to the company - with amounts and timing of contributions at will.  Perhaps to avoid triggering covenants in debt agreements.  Once converted the shares could be sold back into the market - taking a loss on the conversion but still perhaps a price to be paid for keeping the company operating.  If anyone out there has a thought on this topic, I'd be very interested.

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