First off the blocks

From the moment it touched down in Dubai in the 1970s, Drake & Scull International has appeared untouchable, raking in a series of lucrative contracts that saw it become the first specialist contractor to list on the Dubai Financial Market last year. Diana Milne meets CEO Khaldoun Tabari, and tries to find a chink in his armour.

“Libya is an emerging market. It has been in isolation for some time because of the sanctions that were put on it. These have now been lifted”
-Khaldoun Tabari, CEO of Drake & Scull International

When it comes to timing, Drake & Scull International is bang on the mark.  The mechanical engineering contractor was the first on the scene in Dubai, arriving in 1973 just in time for the start of the country’s dramatic transformation from desert outpost to global giant. Last July, 35 years on, it launched an IPO on the Dubai Financial Market, which was 101 times oversubscribed and raked in US$325 million for the company. Unbeknown at the time to Drake & Scull, it narrowly missing coinciding the launch of its IPO with the sudden downturn in the UAE economy, which would have resulted in a very different outcome for the facilities management aficionado. “The IPO has been exciting because it was so timely,” says Drake & Scull CEO Khaldoun Tabari. “Right now the market is prohibitive in the sense that there is no money out there,” he goes on to say, adding that the company has, as a result, shifted its focus away from Dubai to other parts of the GCC, in particular Abu Dhabi and Saudi Arabia. “Two or three years ago we had a boom in Dubai but now it has come down and it has levelled off,” he says.

Dubai-based Drake & Scull is one of the biggest beneficiaries of that boom – with an order book currently estimated to be worth over US$1.4 billion. It is working on 35 projects and in the first quarter of this year its first quarter profit rose by a massive 162 percent compared to the previous year, to US$21.2 million. To date it has worked primarily in the UAE on iconic projects that have recently included Dubai Festival City, Jumeirah Beach Residence, Zayed University and Rashid Hospital. And despite the downturn, the orders keep flooding in; in May it was awarded the US$62 million mechanical electrical and plumbing (MEP) contract for the Kingdom of Sheba development on the Palm Jumeirah bringing the total value of its projects there to over US$380 million. In the same month its civil contracting subsidiary, Gulf Technical Construction Company (GTCC), was awarded a US$27 million MEP contract for the Mangrove Place project on Al Reem Island in Abu Dhabi.

Exiting the comfort zone
While its luck hasn’t run out yet, timing-wise, Tabari says he knows it’s time for the company to change its strategy and seek opportunities outside its domestic market. The GCC construction industry has been dealt a harsh blow from the global economic downturn with some estimating the total value of the industry has more than halved from US$1.5 trillion in July 2008. It is time for Drake & Scull to identify where the next big opportunities will be and to ensure it beats the competition to get a place there. One of those countries is Libya. It hopes to set up an office there by the third quarter of this year, pending board approval, and Tabari describes the potential in the country as “humungous”.

“Libya is an emerging market. It has been in isolation for some time because of the sanctions that were put on it. These have now been lifted. There are a lot of foreign and private investors already there. It is a little bit risky but things are getting clearer and we believe the potential there is humungous because of the lack of infrastructure of any kind there, whether it’s water, power, schools, hospitals. So there is huge potential for contractors from anywhere there.” Saudi Arabia will also be an important market for Drake & Scull International going forward, says Tabari who describes how the country shares Libya’s lack of infrastructure – a gap his company hopes to fill: “We are looking at projects in Saudi Arabia related to colleges and healthcare. There’s a lot of work going on out there and for us it’s only a matter of time. We are putting in a lot of effort then hopefully we will achieve success there. It’s a country which is going to spend a lot of money on infrastructure such as hospitals, schools, water and power, which is mainly our business.” The company also has projects in the pipeline in Jordan and, further afield, in Thailand.

Tabari acknowledges however that regional and global expansion won’t be easy particularly due to the logistical challenges of recruiting enough manpower to work on the projects and shifting that manpower across different sites: “It’s difficult to get countries’ permission to move workers from one area to the next. In the UAE we take it for granted. We’ve got the people, we get a job, we man it and we do the work. But when you go to work, for instance in Qatar, you have to start all over again. You might be able to transport senior management, say ten or 15 people. But contracting needs thousands of workers.” He goes on to say that exiting its domestic market will mean the company won’t enjoy the financial advantages of being a domestic company that it has enjoyed on its home turf: “Anytime you go to a new country and you ask for credit it becomes difficult and it favours the contractors locally if they are available. Fortunately [in the UAE] we as Drake & Scull have special abilities which makes life easier for us, Being for instance in high rise buildings or having built so many water treatment plants or district cooling plants. We have the edge over the local contractors who haven’t done it.”

Infrastructure focus
As well as shifting country focus Drake & Scull is also focussing on different areas of work as the downturn reduces demand for what has traditionally been its core business, MEP. As demand for this relies on new building projects, Tabari says he expects turnover from this to reduce in 2009. However he says there will be increased demand for Infrastructure, Water and Power (IWP) from less developed countries like Libya and Saudi Arabia which face increasing demand for facilities to support their growing urban populations.

“I would say the IWP division, power, water treatment plants, and district cooling plants, are the most significant parts of the business going forward and will give us the turnover and growth that we need. In terms of normal MEP work, I think in Dubai that is going south. In other words there aren’t many buildings being built. You are not going to find any buildings that are seven storeys tall coming up, at least not at the rate that they used to. So the MEP division that we have will definitely lose turnover but this will be more than compensated for by the growth we are seeing in IWP.” He goes on to say that Drake & Scull’s acquisition of civil contracting firm GTCC in 2007 – which led to the subsidiary’s turnover increasing from US$13 million in 2005 to over US$108 million in 2008 – has proved a considerable advantage in the IWP area: “For water treatment plants and sewage treatment plants for instance, you need a civil contractor to do the infrastructure around that.  The two go hand in hand and our acquisition of GTCC is right now complimenting our delivery mechanism by actually doing the project management for us on contracts for projects such as district cooling plants.”

Acquisition spree
Drake & Scull now hopes to emulate the success of the GTCC acquisition by making further strategic purchases of GCC based companies. Tabari reveals that the company is currently in negotiations to acquire four companies in Saudi Arabia, Qatar and Oman: “They are basically in our line of business. One is a civil construction company to help us in our infrastructure projects. Strategically we feel that infrastructure is one of the main areas for our expansion going forwards. That’s why we are pushing hard on that front.” He goes on to say that the company hopes to complete the transactions in the third quarter of the year: “We are currently doing due diligence – financial and legal. We already have board approval to go ahead, subject to finalising all these issues. Then we will bring this to the board and hopefully by the third quarter we will have these companies under our wing.” These acquisitions form part of Drake & Scull’s strategy to achieve 25 percent growth in profits and revenue this year. “I think I have stated before to many people that we are expecting to achieve 25 percent growth this year and that’s going to come from acquisitions and from introducing ourselves to new markets such as Libya and Jordan,” says Tabari. “I think Drake & Scull has a fantastic future ahead of it and that is just the beginning.” It’s a sharp departure from the company’s 40 to 60 percent growth last year, but still a highly ambitious target given the economic conditions in the region. Let’s hope, that on this occasion Drake & Scull’s timing isn’t wrong.