Executive Summary
Abu Dhabi Ship Building is a shipbuilding company that appears to have been experiencing significant financial difficulties in the year 2014. The difficulties are mostly exhibited by the profitability ratios, even though other performance factors have been decreasing as well. The company underperformed in the terms of efficiency, even though the solvency increased in comparison to the year 2012. From the point of view of investment, the negative price-to-earnings ratio appears to be among the most unpleasant consequences of the situation. According to the Wall Street Journal [WSJ] (2015), the situation is changing, with the revenues of the company demonstrating an increase that, however, does not cover the major loss of the year 2014.
It can be concluded that the management of the organization is tending to the problem. Given the fact that the current geopolitical situation could increase the demand for the company’s products, this opportunity should be exploited, if it proves applicable. Still, given the United Nation (2015) prognoses of a global economic slowdown possibility, the primary conclusion of the report consists in the fact that the current economic situation is not favorable for the company.
The current report is based on the information gained from two official financial statement reports of the company along with Abu Dhabi Securities Exchange (2015) and the WSJ (2015) as the secondary sources of the relevant data (ADSB, 2014; ADSB, 2015b).
Understanding the Company
Summary
Abu Dhabi Ship Building Public Joint Stock Company (ADSB) is listed on Abu Dhabi Exchange with its share price currently amounting to 2.9 AED. 10% of the company’s shares belong to the Government of Abu Dhabi; 40% are owned by Mubadala Development Company, and 50% are owned individually (ADSB, 2015a). Founded in 1995, ADSB (2015a) constructs “highly complex naval ships including the integration of weapon combat systems” and offers support for naval units, repairs, and refits (para. 2-3). ADSB (2015a) engages in the partnership with companies all over the world; apart from that, the company has been expanding through acquisitions and joint ventures to solidify its position of a “leading ship builder and support contractor for all Naval, Military and Commercial operators in the Gulf Cooperation Council” (ADSB, 2015a, para. 3).
For example, in September 2012, ADSB finished the acquisition of GLNS (a limited liability company busy with naval support services). Similarly, a new joint venture “Meya Holdings” was created by ADBS together with DeBirs Yachts; the former owns 70% of the business (ADSB, 2014; ADSB, 2015). These events are significant for the company since they are supposed to ensure the stability of its position, even though they appear to have resulted in notable expenses. These actions could have contributed to the unsatisfactory performance reflected in the 2014 reports of the company (ADBS, 2015b).
The major competitors of the company include Yangzijiang Shipbuilding Holdings Ltd. (price-to-earnings ratio (P/E) equals 6.37), Boustead Heavy Industries Corp. (P/E equals 30.13), and Sanoyas Holdings Corp. (P/E equals 6.11) as claimed by WSJ (2015). Here, it should be pointed out that the data for the competitors is taken for the year 2015; the ADBS data for the same year is not yet issued by the organization.
Demand
The offers of the company include both commercial and military vessels. The demand for commercial shipbuilding, according to Birkler (2005) has been increasing throughout the beginning of the century, while the demand for military ships, though especially important for the domestic market, has been relatively slow to grow. At the same time, given the fact that the company produces both kinds of vessels and, apart from that, provides the necessary services for them, it can be concluded that the ADSB can enjoy both the increasing demand for commercial ships and that for the military ones.
Apart from that, ADSB ensures that its products are created with the help of state-of-the-art technology as well as modern materials that are used and approved of internationally. The partners of the company are chosen with the intent of ensuring the high quality of the resulting product (ADSB, 2015a). Finally, as the company works to become the leader of the industry in the Gulf, it can be concluded that the demand for its high-quality products would not be expected to decrease.
Recent Events
When commenting on the global economy development in 2015, the United Nations (2015) point out that the economic growth is “modest” at best, and its chances of slowing down are rather noticeable. UN (2015) point out that the reasons for such a tendency include the aftershocks of the crisis of 2007, the plunge in the oil prices and, especially, the recent increase in the number of geopolitical conflicts in the world (including the ISIS danger).
The results of these global changes can be twofold for the company. While the general slowdown of economic growth cannot be beneficial, the problem of terrorism and war conflicts brings forth the necessity of protection. Therefore, the demand for ADSB military ships can rise in the near future, but the general uncertainty that characterizes the current economic situation makes it difficult to suggest more reliable predictions.
Financial Statement Analysis
Trend analysis of the financial statements of the company for the past two years (that include the data for the years 2012-2014) demonstrates that in 2013, the company performed well in comparison to the previous years (in every aspect except for the revenues), but in 2014, the situation changed radically (see Table 1). Nearly all the parameters of the company’s performance fell dramatically, which is especially visible in the terms of revenue and net income.
Here, it should be mentioned that the 2013 acquisition could have affected the performance of the company in numerous ways. Apart from that, as the United Nations has stated, the global economic development has seen better days. Still, the significant difficulties of the company’s performance raise concern.
While the financial statement analysis is capable of providing the information about a company’s performance, it is much more convenient to make suppositions with the help of ratio analysis (see Table 2). To calculate the ratios, the formulas from the book by Rich, Jones, Mowen, and Hansen (2012) were used.
From the ratio analysis, it becomes obvious that the profitability of the company (gross margin, net profit, return on assets ratios) decreased in 2014. At the same time, it should be pointed out that the liquidity appears to stay relatively high, with quick ratio increasing in 2014 from 1.15 to 1.26. This statement is confirmed by the solvency ratios that, despite decreasing in relation to 2013, are lower in 2014 than they were in 2012. For example, the debt ratio of 2014 decreased to 42% in comparison to the 48% of 2012. At the same time, in 2013, this ratio was 38%, which means that, in relation to 2013, the share of the debt in the company’s assets has increased.
The efficiency ratios (primarily asset turnover ratio) had increased in 2013 to decrease in 2014. The decrease is noticeable even in relation to the year 2012 that exhibited the asset turnover ratio of 0.58 while it fell to 0.4 in 2014. In other words, the year 2014 shows a deteriorating performance in comparison to 2012 and especially to 2013, the year that showed improved performance. This deterioration is particularly visible in the terms of profitability: 2014 is a year of loss for the company (ADSB, 2015b). This fact has reflected in the price-to-earnings ratio, which is extremely important for investors. In 2013, the P/E ratio of the company was 5.4, which is normal for the industry (WSJ, 2015). In 2014, however, the P/E ratio fell to -3.94.
The number of ordinary shares has remained unchanged throughout the analyzed period (ADSB, 2014; ADSB, 2015b). As stated by WSJ (2015), the share price of the company has grown significantly since the end of 2013 (when it was fluctuating around the point of 1.4 AED); but, in comparison to the beginning of 2014 when the company share was exhibiting best results (5.12 AED), the price has fallen. Apart from that, earlier this year (the beginning of September) the share price was 3.8 AED. The rise in the share price at the beginning of 2014 could reflect the improving performance of 2013; its fall appears to reflect the difficulties that are demonstrated by the data from the ADSB (2015b) report.
As of 2015, the market cap of the company amounts to 574.50 million with the single share price amounting to 2.9 AED. For the past two months, the average price has been slightly decreasing (WSJ, 2015). The stability of the share price suggests an improvement. It should be also pointed out that, in 2015, according to WSJ (2015), the company’s revenue keeps growing (by almost 12%). Therefore, it can be concluded that the situation is going to change and is being changed by the management of the company.
Conclusion and Recommendations
The evidence of the company underperforming in the year 2014 is slightly mitigated by the recent increase in revenues that, however, is not included in an official company report and does not make up for the tremendous drop of 2014. In general, the investment potential of the company as of 2014 is not very high, even though with the revenue increase, the situation is expected to change. Given the general uncertainty of the global economic situation that is in many ways connected to geopolitical conflicts, it becomes difficult to make predictions about the company’s future.
Still, it can be concluded that, as seen from the 2014 data, the company needs to pay particular attention to increasing its profitability. The recent global events could raise the demand for the company’s products and services, and this opportunity should be exploited, should it become applicable. The year 2013 demonstrates that the company is capable of enhancing its performance, and it is expected that the current improvement tendencies will be maintained by the company’s management.
References
Abu Dhabi Securities Exchange. (2015). Abu Dhabi Ship Building PJSC. Web.
ADSB. (2014). Reports and Consolidated Financial Statements for the year ended 31 December 2013. Web.
ADSB. (2015a). About Abu Dhabi Ship Building. Web.
ADSB. (2015b). Reports and Consolidated Financial Statements for the year ended 31 December 2014. Web.
Birkler, J. (2005). Differences between military and commercial shipbuilding. Santa Monica, CA: Rand.
Rich, J., Jones, J., Mowen, M., & Hansen, D. (2012). Cornerstones of financial accounting. Mason., OH: South-Western.
The Wall Street Journal. (2015). Abu Dhabi Ship Building PJSC. Web.
United Nations. (2015). World Economic Situation and Prospects 2015. Web.