Arabtec share surge leaves us all baffled

What on earth is going on at Arabtec? That’s the question that analysts all over the Gulf are asking themselves right now as the company’s shares head for the stratosphere. And — for once — not one of them can provide a word of explanation.

As CFO Ziad Makhzoumi told Arabian Business this week that four years ago Arabtec was winning so much work that it even had to turn down contracts. If any company symbolised the boom in Dubai’s property fortunes, it was Arabtec.

Since 2008, however, the story has been much, much quieter. As the backlog subsided and the Dubai work dried up, Arabtec found itself fighting off cutthroat competition for work elsewhere around the Gulf and beyond.

With some contractors reportedly offering bids below cost price just to secure work, margins have been slashed wafer-thin. Arabtec also came under fire from market analysts, who were worried about the company’s receivables, as well as a fall in profits.

One solution to both those concerns — a $1.7bn buy-out of 70 percent of Arabtec funded by the deep pockets of Abu Dhabi-backed investment firm Aabar in April 2010 — failed to materialise.

The firm’s bottom line growth tumbled. In the first quarter of 2011, profits fell by 80 percent, while in the second quarter, they dropped by 74 percent. By the third quarter, however, profit surged by more than five times, although the company gave no reason for the results.

None of this, of course explains why Arabtec’s share price has rocketed during the first weeks of this year. As Arabian Business went to press, Arabtec’s share price was at its highest for more than two years — up by 64 percent so far in 2012.

Over the course of the last 12 months, Arabtec has seen an 88 percent surge in the value of its stock. By comparison, Emaar, another bellwether for the Dubai Financial Market’s property index, has seen its shares dip by 13 percent.

However, there appears to be nothing to justify the hype. Recent announcements by the company include a $153m contract to redevelop Terminal 2 at Dubai International Airport. Subsidiaries of the firm have also won contracts totalling almost $70m in Abu Dhabi.

These awards are not peanuts — but they’re certainly not enough to set the markets alight.

Markets thrive on sentiment — and someone clearly knows something. Right now, speculation is swirling over the Abu Dhabi airport Midfield Terminal, a massive contract for which Arabtec is competing. When speaking at our Arabian Business Forum in November 2011, Makhzoumi himself specified that aside from the airport contract and some oil and gas-related work, there are virtually no big projects being undertaken in the UAE right now.

The story is different in Saudi, of course. After King Abdullah’s announcement last year that an extra 500,000 homes will be needed over the next five years — on top of original plans to add 1.65 million homes during the same period, there’s clearly room for growth.

As the kingdom’s giant contractors — like Saudi Oger and Saudi Binladin — don’t have a great deal of experience in building the kind of giant masterplanned residential communities in which the Dubai firm specialises, Arabtec undoubtedly stands to benefit. But investors have already factored all that into the share price.

If, in the next couple of weeks, a bumper contract is awarded in favour of Arabtec, it will do absolutely nothing to restore confidence in Dubai’s battered bourse. Let’s hope that sentiment — and nothing more — is to blame.

Ed Attwood is the Deputy Editor of Arabian Business.