Arabtec to approach banks, shareholders for more cash

Arabtec had accumulated losses of Dh2.27 billion by March 30 after posting negative results in six successive quarters. Antonie Robertson / The National

Arabtec Holding, the country’s biggest-listed construction company, may need to tap shareholders in the future to shore up its balance sheet to bid for more prestigious contracts, according to analysts.

Arabtec’s board will meet on Monday and discuss plans to talk to shareholders and banks about improving its capital structure, less than two weeks after shareholders approved a move to use Dh1 billion of reserves to writedown losses, the company said yesterday in a statement to the Dubai Financial Market.

The company had accumulated losses of Dh2.27bn by March 30 after posting negative results in six successive quarters, which meant it was close to breaching a market rule that states companies are not allowed to accrue losses amounting to more than 50 per cent of its share capital. Arabtec’s share capital stood at Dh4.6bn at the end of the first quarter.

The company, which counts the Abu Dhabi state-owned fund Aabar as its largest shareholder, has been through a whirlwind of trouble over the past three years, with the exit of senior managers and its chairman amid doubts about building 1 million homes in Egypt under a multi-billion dollar deal.

Sanyalak Manibhandu, the head of research at NBAD Sec­urities, said that Arabtec “will probably need to have more long-term financing” to enable it to bid for substantial new projects. There have been rumours in the marketplace that the company is preparing a bid to participate in the construction of Emaar Properties’ new tower at Dubai Creek Harbour, following on from its earlier work at Burj Khalifa, which it built alongside Samsung C&T and Besix, he added. Arabtec declined to comment on the rumours.

“In the short term, they will probably want to borrow more money from banks. And at some point, when things get better, they may have to tap shareholders for more equity,” Mr Manibhandu said. “But that can’t be done in the near term. The cost of equity would be a lot higher than the company would want to pay.”

He argued that the company needs to demonstrate a couple of profitable quarters and book some new contracts before tapping investors for more cash.

Sebastien Henin, the head of asset management at Abu Dhabi-based The National Investor, said that Arabtec is operating in a tough market with “intense competition” for contracts.

Firms in the sector are also having to contend with late payments from government clients, which are eating into their cash flow, he added.

“Margins have tightened a lot and from the credit point of view things have deteriorated,” said Mr Henin. “It would be in a more comfortable position if it were to raise more capital.”

Allen Sandeep, a director of research at Egypt’s Naeem Brokerage, said that the contractor faced a “real challenge” in addressing liquidity requirements.

“Cash-to-backlog has plummeted to 2 per cent, well below the 5 to 10 per cent conven­tional norm,” he said.

He pointed to the fact that its working capital had increased by more than Dh500 million during the past couple of quarters, which is mainly due to an increase in money owed to it.

“Total receivables (inclusive of Saudi Arabia) amount to Dh9.5bn, based on our calculations.”

Mr Sandeep said options include a bond issue, a convertible sukuk or another rights issue. Arabtec had raised a Dh2.4bn in a rights issue in July 2013 in a move that doubled the size of its shareholder capital.

“In addition, we do not rule out the company writing off some more of its outstanding receivables,” Mr Sandeep said.

Arabtec shares rose 0.7 per cent to Dh1.43 in Dubai yesterday. They are up 14.4 per cent so far this year.

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