Galfar Engineering & Contracting SAOG (GECS) Earnings Call Transcript & Summary

Right. I think we can start, and I am Hamoud Tobi, CEO of Galfar Engineering and Contracting Company. And I'm joined in this session from my team by Mohamed Al Yahyaei, our Chief Financial Officer; and by [indiscernible], the Company Secretary. So good morning, ladies and gentlemen. On behalf of Galfar Engineering and Contracting, I would like to all our shareholders, investors, analysts and all participants joining us in this session. Thank you for taking the time to participate and these sessions are important to us because they provide an opportunity not only to present our financial results, which has been already published as per MSX requirement, but also to communicate directly with the stakeholder communities about where Galfar stands today, what we have achieved, the challenges we continue to manage and importantly, where we see the company going forward. [Foreign Language] Today, I will take you through our performance for the first half very brief summary of the financial results for the first half of 2026, our strategic direction and the outlook for the construction market in an and the opportunities we see ahead. Our objective from today's session is pretty straightforward. It's about transparency, it's about engagement and value creation. We want our shareholders and potential investors to have a clear understanding of Galfar performance, strategy, including both the progress we are making and the areas that continue to require management attention. Therefore, I will focus on today's session in 4 areas: the strategic progress, the financial performance, the market and order book outlook and finally, the investment position for Galfar. After the presentation, there will definitely be a session to take your question and hear your perspective. Before discussing the results, allow me to briefly put Galfar into context. Galfar has been operating continuously since 1972 and today remains on or the largest, if not the largest engineering and contracting company in Oman. Our capabilities extend across various sectors. We operate in energy and industrial projects, infrastructure, civil and environmental sectors. This diversification is very important because it means that Galfar is not dependent on a single sector or a client category. We have the technical capability resources, and very importantly, the track record to participate across many of the major areas of investments are taking place here in Oman. And as a publicly listed company, our responsibility goes beyond doing projects. We have a responsibility to create sustainable value for our shareholders and contribute in a meaningful way to the national economy. Our consolidated financial performance and position incorporates our 100% subsidiaries, such as Aspire Readymix, Aspire Projects and Services and other subsidiaries and associates and joint ventures. It is worth to mention that our subsidiaries are also benefiting from Galfar transformation strategy and has shown noticeable improvements in their performance over the past years as well. Over the past few years, our focus has been primarily on transformation and Today, we are moving into the next stage. Our team for the next stage is beyond transformation growth to profitability. And that spells clearly the direction in which we want to position Galfar moving forward. The distinction here is very important because transformation was necessarily to strengthen the foundation of the business. But by itself, it is not the ultimate objective. The objective is to translate those improvements into stronger margins, better cash generation and sustainable shareholder value. Our strategy continues to be built around 5 strategic priorities, which we reiterate in our quarterly disclosures and report. These 5 strategic priorities are people and culture, financial and liquidity, projects and operational excellence, sustainability and diversification and technology and innovation. And I am pleased to announce that we are making steady progress to achieve the initiatives and the performance indicators that have been prescribed for each of these strategic priorities. And across all the 5 pillars of our strategy, our emphasis is increasingly on measurable outcomes. We want to better our project selection. We want to be better in our project selections, stronger to have stronger estimation disciplines, improved execution, tighter cost controls, stronger working capital management, and ultimately, better returns from every real of capital deployed. And our strategy is also closely aligned with the country 2040 Vision. Telfer participates directly in the development of the infrastructure required for economic diversification from roads to utilities and water infrastructure to energy, to industrial and other development project. But our contribution is broader than just physical infrastructure. We are developing Omani talent, creating sustainable employment, supporting local supply chains, local suppliers, vendors and subcontractors, investing in technology and innovation and increasingly incorporating sustainability into how we execute projects. For us, as Galfar, Oman 2040 Vision is, therefore, not simply a national framework that we support. It's also creating many of the markets in which we expect the company to grow in the future. Let me now move to the business and financial performance highlights. Our revenues has progressively recovered from the levels we experienced several years ago, and our focus today is increasingly on the quality rather than simply the size of revenues. The same principle applies to our order book. We certainly want to grow the order book but not at any cost. Our peering strategy is becoming increasingly selective. We are looking carefully at contractual risks, margin potentials, client profiles, cash flow characteristics and the execution capability before committing resources. The objective is, therefore, not simply to build a large backlog. And if you are into the contracting business, you would realize that's something that is easy to achieve, simply building a large backlog is easy to achieve, but our focus and priority is to build quality, healthy and ultimately profitable backlog that is capable of generating sustainable returns. In this slide, which is particularly important, it demonstrates the progress being made in the underlying performance of the company. For the parent company, our first half Revenue reached approximately OMR 137 million compared to OMR 123 million in same period last year, demonstrating an increase of 11% in revenues. More importantly, a very critical indicator for us, EBITDA is increased from approximately million in 2025 same period to around OMR 12.5 million for the first half of this year. Our EBITDA margin consequently improved from 6.5% to 9.2%. And the bottom line, our profit after tax increased from around OMR 200,000 in H1 in 2025 to around OMR 2 million in H1 in 2026. These are encouraging results, and what is particularly important to us is that the improvement is visible not only at the revenue level, but through gross profit, EBITDA and net profitability. This indicates that the measures that have been implemented around project performance, cost management and operational disciplines are beginning to translate into financial results. We, nevertheless, recognize that our net margins remained modest and improving the profitability further remains a key management focus and priority. It's probably worth to note that in 2026, there is also the exceptional challenge of the geopolitical conflict and the impact this had in our business, particularly escalating material prices affecting deliveries of materials and impacting deliveries also some of the project execution schedules. As management in Galfar, we remain vigilant to monitor the impact and mitigate to the maximum possible extent the impact of the geopolitical conflict. Looking at our balance sheet indicators, the total parent company equity increased from approximately OMR 29.6 million at December -- at the end of December 2025 to around OMR 31.6 million at the end of June 2026. A key highlight that is worth to mention is that also by the end of Q2 2026, the company exited the accumulated losses situation and started building return earnings. It's a positive indicator that we are focused to sustain and continue to build on. This improvement reflects the return -- the improvement in equity reflects the return to profitability and the gradual strengthening of the company's financial position. At the same time, net debt remains an area that we are actively managing. There has been delays in collections and receipt of some payments but we continue to give collections of receivables, collections of payments, the attention and focus it requires at different levels of management. Of course, the nature of our industry is working capital intensive, and therefore, as mentioned, improving collections and reducing the cash conversion cycle and maintaining disciplined financing remains important priorities. Our objective is clear as the profitability improves, we also want that improvement to translate increasingly into stronger operating cash flow and a healthier balance sheet. Let me know turn from summary of financial performance to the market. And the overall outlook for Oman remains supportive. The 2026 development allocation together with the continuing investment across infrastructure, utilities, industrial development and energy provides meaningful pipeline of opportunities for us at Galfar. We see demand forming across 4 major areas reflecting such as energy and industrial projects, transportation and logistics, hotel and environment and civil and social infrastructure, as well as are residential development. There is, however, an important qualification that is worth to make. The opportunity pipeline is strong. but the timing of project awards remains uneven and sometimes challenges. There are many opportunities that we have edema opportunities that we have bid on However, that timing awards of these opportunities is a critical factor that affects not only Galfar but the entire sector and economy in general. We are seeing extended evaluation periods in the market, sometimes longer validity periods and, in some cases, delays between tendering and the actual award. As explained, this has implication for contractors and is one of the reasons we are maintaining discipline in resource planning and tender selection. Looking further ahead, our assessment indicates that Galfar addressable market could increase by approximately 29% moving forward. Energy and Industrial project is expected to be among the largest growth -- or the largest growth engine, representing around 44% of the identified opportunities by 2028. But we also see significant opportunities in infrastructure and civil and environmental projects. And the important point for our steam shareholder is that Galfar does not need to capture a disproportionate share of this market. Our objective is selective conversion. We want to target projects where Galfar has a competitive advantage and where the risk and return profile meets our internal requirements. So this brings me to an area that I expect will be of particular interest to you, which is on the company's order book. We entered 2026 with an order book of approximately OMR 745 million. And at the end of quarter 2 this year, our order book stood at approximately OMR 635 million on annual which is still solid and substantial and gives a reasonable visibility into future revenues. However, we recognize that the reduction and rebuilding the order book is one of our immediate priorities. And it is important to look at this together with the opportunity pipeline. At the end of Q2, we had approximately OMR 2.1 billion worth of active opportunities, which compromises around billion under evaluation tenders that we have participated in and are under evaluation and approximately another OMR 1 billion of tenders and projects under preparation. Our target is to move the order book to more than OMR 800 million to OMR 1 billion. Achieving that target does not require us to win every tender. Our strategy assumes, as mentioned previously, selective conversion of the available opportunities while protecting margin and contractual quality. We are broadening the types of opportunities we pursue and the joint venture structures that we are willing to participate in as well as not only focusing on to EPC construction type of projects, but operate and maintain service type of contracts remains among our highest priorities. This should gradually diversify the business beyond the traditional EPC model and create greater potential for reoccurring revenues. So while there is a reduction in the order book from where we started the year and where we ended in Q2. Over the pipeline of opportunities, as explained, either opportunities in which we have already submitted a bit and they are under evaluation or opportunities in which we are preparing. It remains very substantial and reasonable success rate or win rate of will lead us to refurbish and rebuild our order book to the levels that we aspire to keep. I would like to touch base also on another important part of the Galfar story, which is the overall contribution to Oman and the country. It is really -- Galfar is one of the -- it is really Galfar is the largest employee or in the private sector or non-government private sector, if I may describe it in that way. Close to 5,000 Omanis, employees proudly working in our large workforce. We also engage close to 1,400 or many suppliers, including SMEs, and subcontractors and vendors. So Galfar stems today as a big enabler of the local supply chain. We also have more than 3,700 shareholders which means that the value we create is distributed across the broad shareholder gains. In addition, we continue to invest in structures programs and community initiatives. For us, therefore, our in-country value or ICV is not simply a tender requirement. It's embedded in the way Galfar operates. And our scale allows us to create employment, develop national capabilities, support SMEs and local suppliers, and also retain a significant proportion of project expenditures within the many economy. So bringing all of this together, what is the Galfar investment proposition today? First, the company returned to profitability. And first half of 2026 demonstrates continued improvement. Secondly, our EBITDA and operating efficiency margins are recovering indicating stronger underlying operating performance. Thirdly, our equity position is also strengthening. And as mentioned that by end of Q2, Galfar moved from accumulated losses to retain profit earnings position. Fourth, although we need to replenish the order book, as I explained, but we have a substantial and diversified pipeline of opportunities in front of us. Fifth, our capabilities are closely aligned with the sector receiving significant investments under the Oman 2040 Vision Directions. And finally, Galfar has something that is difficult to replicate quickly: more than 5 decades of experience, established client relationships, and substantial national workforce, extensive engineering and execution capabilities and the capacity to deliver large and complex projects. Over the past 5 decades, there is not a single project that Galfar couldn't conclude or could not deliver. And this is a big testimony to the capability and confidence that Galfar enjoys in the online market in project delivery. Our task as a management is to convert those strength into sustainable profitability and ultimately greater shareholder value. Ladies and gentlemen, if I were to summarize our position today in a few words, I would like to say that Galfar has moved from recovery into a phase of disciplined growth. The improvement in H1 '26 is encouraging, but we are not complacent. We are not slowing down. There is still considerable work ahead of us. We are mindful of the market circumstances the changes in the market, the impact of the geopolitical conflict and the prolongation of this -- if there are prolongation, this conflicts the impact that this could have on the wider economy and in our business specifically. And our priorities for the remainder of 2026 are clear continue improving the project profitability, strengthen cash flow and working capital management, replenish the order book with quality projects, maintain strict bidding and contractual discipline, and we'll continue developing new areas for growth. The market opportunity in Oman is significant. Galfar has the scale, experience, people and the capability to participate meaningfully in the available pipeline of opportunities, but our focus will remain on profitable growth rather than growth for its own sake. And ultimately, our ambition is to build stronger Galfar that delivers consistently on its clients contributes meaningfully to man, provides opportunities for its people and generate sustainable value for its shareholders. Thank you once again for joining us today in this engagement session and for your continued interest and confidence in Galfar. My colleagues and myself will now be pleased to take your comments, questions, clarifications. So the floor is open. Thank you very much.

Okay. So I see, Izzul raised hand. Yes, you can go ahead, please.

I have a couple of questions. One is in terms of your order book. On the annual basis, what seems to be the reasonable new projects in basically plan that you're looking at?

Yes. Thank you, Izzul. Our target is between OMR 250 million to OMR 300 million worth of new projects to be backed. But as explained, our focus is really selective bidding. In this type of business, it is not that complicated to build large order book and build it very quickly. simply a bit cheap in are tender and then you are positioned very strongly to build your order book, but that's not our strategy has Galfar. While we understand that the order book, the strength of all the order book, the size of the order book is critical and important our strategy is selective quality or and we are confident we can achieve this.

And excluding the real project that you have currently, what is the average duration of the order book and the margin profile?

The average duration of the order book, I think, gives you visibility for around 3 years on revenues. But of course, there are contracts that's not longer term than the 3 years, but this is on average.

Okay. And the margin profile for the current order book?

Our focus is, of course, to maximize as explained profiles, and we have seen the improvements in our EBITDA margins in our net profit margins. And we will continue focus as a management, as a company to improve and increase these margins from our projects.

Okay. And in terms of impairment, can you provide some guidance or color on how much of impairment do you expect on an annual basis?

Of course, impairments, this is a routine exercise impairment assessments, be it impairment on receivables or others. As part of our financial and accounting processes and IFRS requirements, there is quarterly and annual assessments of all impairment requirements. Mohamed, our CFO, if you would like to add something to that?

Yes. Of course, we, as Dr. Hamoud mentioned, we don't follow the accounting standard and we have our own ECL and hematology. That's been, of course, audited, agreed by the external auditor, PwC. And of course, that's fixed since 2 years almost. And we have so far, there is a provision more than almost provided more than OMR 12 million as on debt.

Okay. Abbas, you have your hand up. You'd like to go through, please.

Yes. I have a few questions, but before that, I have a comment. I think I've been tracking Galfar in the Omani market.

If you could introduce yourself, please? Anyone, if you could introduce yourself and the organization you represent?

Yes. Yes. My name is Abbas Muslemi. I'm the CIO of [ Ubal Capital ] and I've been tracking alfa in Omani markets from 2008. So I think the comment that I had was the progress that I've seen Galfar make under yours and Mr. Yahyaei's leadership is real, both in terms of discipline when it comes to tendering discipline of executing discipline or budgeting and that is not lost on the markets. We know that the company went through a challenging time, but I can see the numbers. I can see the cash flows in shop. And I just wanted to sort of put it on the record in terms of someone who's looked at the company for many years. I've seen the progress that the company has made under your and Mr. Yahyaei's leadership. So that's the comment.

Thank you. Appreciate it.

Yes, sir. The question I have is -- I have multiple questions. Of course, one of the key challenges you face is the working capital intensive nature of the business and, of course, high leverage, historically, you guys inherited. Now they had some talk about capital raise over the last couple of years, but nothing has come through. Now I was looking at [ ALEC ] as a model in similar company, what Galfar is. Galfar is not just important to the construction industry, it's important to Oman, biggest employer of Oman in the private sector, almost the growth of Oman in some part, Galfar has played a big role in the infrastructure growth. Why is the company not discussing with the government taking a private placement or a sec because Galfar is so strategic to this country. So what are your thoughts on that actually, that the government becomes a shareholder?

Thank you for sharing that comment and the clarification, Abbas. As Galfar, of course, we have recently also engaged strategic financial advisory, which is -- to review the potential and possibility for us with regards to capital raising and what are the available options, et cetera. This strategic financial study is under deliberation by the management and the Board. And once it is concluded, and there are appropriate disclosures to be made, definitely, we would share some of the outcome of this strategic financial advisory reviews that we are undertaking. With regard to the second part you have mentioned for government to be brought in contracting company like Galfar with particularly national importance to the country in terms of local money capabilities, track records, largest employer of our money is in the private sector or nongovernment private sectors the importance of such technical capabilities that Galfar has to the delivering of the Oman 2040 Vision, it is not uncommon. And we have seen examples like you said in the region, nearby markets where government investment parties do IPA as stakeholders or inject capital infuse capital into similar engineering and contracting companies. Here for us as Galfar, we welcome such an opportunity if it exists, definitely, it will come such an opportunity.

Okay. And second question I had is variation orders overruns, time line part and parcel of the business. But is there any big current litigation or arbitration that's going on that you can comment on, which has a material impact either on the profitability or actually on the cash flows, right, of the company. Can you comment on -- because we've been hearing from the grade mine. Some projects have overruns projects have been loss-making. And sometimes it's important to hear from the management and from the great point in the market?

Like you said, variations, claims are part of this business Okay. And you cannot have a project without some challenges, okay, and some discussions about variations and claims. With regards to ongoing arbitrations, I think information about -- we have 2 ongoing arbitration cases with international EPCs, EPC companies. And this information about this are also provided in our financial -- disclosed financial statements and the notes to the financial statements. And we do expect that downward from these arbitrations should come any time soon in the future. We are hoping that the awards could be received. And according to our, of course, legal assessments, advices, we are optimistic, but we need to wait and see the outcome of the arbitration awards.

What could be the potential size on the P&L or the cash flow, sir?

This cannot be disclosed now, Abbas, okay, because until the arbitration proceedings are formally concluded, et cetera. Once it is formally concluded and if the outcome warrants disclosures. This will definitely be made available to the market.

I had another question. You went through very patiently explaining the order book situation and the rundown of it and the projects that are under consideration. Now I have another view on this. The fact that you have exercised discretion and good judgment when it comes to budgeting. I've seen some of the L1s versus your bids and the gap is wide. And part of that is flowing through and Galfar is not winning order book. Now that's a good thing, but the bad thing is that you have all these huge cost base, both in terms of employees and in terms of infrastructure. Now why do you think things are going to change? Because my point is for the last 2 years, you've not been able to secure big orders because of, at least in my opinion, the discipline that you've shown to budgeting and tendering. Now the market is still very competitive, government tends to pick the L1 most times. So then what changes? Because for me, the big worry now is, as an investor, of course, I want margins, but there will be no margins if there are no projects. So how would you address an investor's concern like mine, who's complementing you for the work you've done, but is also worried that the engine that is Galfar needs a lot of fuel, which is orders, and you don't seem to be securing that?

This is a spot on comment, Abbas. And as mentioned, the pipeline of opportunities is large. And however, and may be attributed to the ongoing geopolitical situation, okay, the time of awards, kind of prolonged award decisions of projects are taking longer. And what we believe we have competitive advantages. And our order book remains strong, and we are a couple of opportunities that we believe we are strongly positioned in, and we are waiting for the award decision to be issued by the project owners. Once those award decisions are issued, there will definitely be the relevant market disclosures. So we are not talking or we are not concerned that there is a systematic or issuing Galfar winning more projects. opportunities, we know we are positioned strongly. We're just waiting for the awards. There are opportunities that are under evaluation. There are opportunities that are under preparation. And as explained in the slide, the pipeline of opportunities is very substantial. And for us, with a reasonable win rate or tender success rates, we would be able to replenish our order book to the levels that we set as a target. But the size of our order book today remains reasonably strong as well. There is another -- maybe if we can diversify?