Dubai builder Arabtec posts major cash deficit for second quarter

Arabtec is likely to need additional financing after its second quarter cash position worsened and profit margins were squeezed, analysts said.

Arabtec's $50 billion backlog, compared to six-month revenues of $1.24bn, increases the risk that it may run out of cash during completion of major projects. Antonie Robertson / The National

Arabtec is likely to need a capital injection or new debt financing after its second-quarter earnings figures showed a significant worsening of its cash position, analysts said yesterday.

Despite a year-on-year improvement of 51 per cent in second-quarter revenues, which jumped to Dh2.41 billion from Dh1.59bn, Arabtec ran a cash deficit of US$340 million (Dh1.244bn) in the first half of this year. It had a net cash surplus a year earlier of about $26m.

The company’s $50bn backlog, compared to six-month revenues of $1.24bn, increases the risk that Arabtec may run out of cash during completion of major projects, analysts said. The backlog stood at about $6bn at the end of last year.

Nevertheless, Arabtec's shares staged a cautious rally yesterdaythat pulled the Dubai Financial Market into positive territory after the release of its second-quarter earnings figures.

The company's share price gained 1.25 per cent to close at Dh4.05, with the DFM closing up 1.89 per cent yesterday. Other gainers included Emaar Properties which closed 1.9 per cent higher. Abu Dhabi's index closed up 1.1 per cent yesterday. Arabtec's shares were volatile, however, falling 6.5 per cent to Dh3.74 each in early trading before rebounding in the afternoon.

While Arabtec experienced a second-quarter profit increase of 11 per cent against the previous year, earnings came in below analysts’ estimates.

Arabtec earned profits of Dh103m in the three months from April to June of this year, as compared to second-quarter profits of Dh92m last year. The company’s profit margin fell to 4.24 per cent from 6.4 per cent in the first quarter.

This fell below the expectations of analysts interviewed by Bloomberg, who expected profits of Dh134m. Analysts polled by Reuters forecast profits of Dh111m.

“We’ve seen an improvement in revenues overall – clearly, there’s been improvement in project execution. But in terms of Arabtec’s net margin, there have been limits,” said Ali El Adou, a portfolio manager at The National Investor.

“Results were worse than what investors were expecting, but that is a one-off, due to higher costs associated with end-of-service benefits related to the latest management change,” he said.

First-half profits totalled Dh240m, up 55 per cent against Dh155m in the same period last year.

Analysts have suggested that Arabtec shares remain expensive, and that a lack of management guidance on the company’s strategy has made it hard to evaluate the company’s revenue, income, and margin prospects.

The company’s project backlog, including a $40bn low-income housing development in Egypt on which margins are likely to be tight, also increased the importance of the company’s ability to execute projects effectively, analysts said.

Arabtec said: “all decisions taken by [Arabtec’s leadership] aim at achieving the shareholders and investors’ interests, elevating the company’s position, increasing the revenues and achieving potential growth in future.”

The company declined requests for further comment.

The company has had a tumultuous few months, as the company’s share price plunged from a high of Dh7.4 on May 14 to a low of Dh2.61 on June 30, following the resignation of the chief executive, Hasan Ismaik, on June 17.

Mr Ismaik resigned shortly after it became public knowledge that he had increased his stake in the company to 28.85 per cent, making him Arabtec’s largest shareholder. His departure was followed by a series of executive-level firings.

Trading in the company’s shares was suspended on July 17 after Bloomberg News reported that Aabar Investments, the Abu Dhabi-backed investment company with a major stake in Arabtec, was in talks with Mr Ismaik over buying his stake in the builder.

Aabar released a non-committal statement on the DFM last week, in which it said only that it was considering its options.

Despite market speculation, it is not known how or whether Aabar or Mr Ismaik will change their holdings in the company over the next few months.

Mr Ismaik sold approximately $4m of his shares on July 23. He retains a holding valued at approximately $1.4bn.

Aabar, which owns 18.94 per cent of Arabtec, is the company's second-largest shareholder. Aabar is owned by International Petroleum Investment Corporation, an Abu Dhabi sovereign wealth fund that manages $65.3bn in assets, according to the Sovereign Wealth Fund Institute.

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