The Dubai Financial Market (DFM)’s long bull run came to an abrupt end last week, as investors fretted over the impact of the insurgency in Iraq and a concern that valuations for some of the market’s biggest stocks were over-inflated. Above all, however, the fallout over a management restructuring at Dubai’s biggest contractor contributed to a collapse in the value of its stock, with more than 50 percent being wiped off its share price by Tuesday evening.
That day, the DFM dropped by 6.7 percent, its biggest daily fall since last August, and there were further losses at the Abu Dhabi Securities Exchange. The index roared back the next day, rising by 6.1 percent as Arabtec recovered by 5 percent, but – in many respects – the extraordinary events of last week laid bare a market that is not quite as robust as investors had hoped.
From the wider perspective of the UAE economy, little has changed. The Dubai and Abu Dhabi property markets have witnessed significant growth over the last 18 months or so. Tourism into both cities is increasing, fuelled by Dubai’s position as a so-called ‘safe haven’ amidst regional unrest, spending on hospitality infrastructure and the ever-increasing numbers of travelers who arrive in the country via the likes of Emirates and Etihad.
In addition, the country was also upgraded to emerging markets status in early June by MSCI, a move that theoretically could lead to institutional investors controlling trillions of dollars in assets allocating funds to the local market. Of the nine equities selected for the upgrade, Arabtec was one.
But the rapid growth of the DFM, up by 108 percent over the course of the last 12 months, had led many analysts to question whether values were overblown. In February, the world’s biggest asset manager, BlackRock, cited “signs of speculative excess that warrants caution” and scaled back its share-buying programme in the country. Local investors did not appear to heed the warning, with market dipping only slightly on the day the announcement was made, before resuming its upwards march the next day.
So a drop in values in the short term, no matter how abrupt, could well encourage outside investors to come in.
“We think generally the premium of the UAE market is justified, but maybe not to this extent,” says Sebastien Henin, head of asset management at Abu Dhabi-based advisory and management firm The National Investor. “What is happening is very healthy for the market and I will not be surprised if some foreign money looking at the market and they invest in the market if the market goes further down… maybe 15 to 20 percent from where we are now.”
Henin also pointed out that he did not believe foreign investors would be spooked by the drop, given that their exposure to emerging markets made them familiar with volatility.
Tariq Qaqish, head of asset management at Al Mal Capital, says while the immediate outlook is uncertain, the downside is expected to be minimal. However, he acknowledges that the downturn is damaging in light of the recent MSCI upgrade.
“I do see opportunities on those levels at a fundamental base where stocks are definitely looking more attractive for investors,” he says. “I don’t see it as a good start for the foreigners in general. It’s a shame that we started the upgrade with this event.”
However, Qaqish also points out that these types of stock market drop “happen everywhere”. “It’s not just specific to the UAE,” he says. “But more transparency, more being proactive to the market in terms of information, that would have helped.”
“Eventually we will see some smart investors getting into the market, especially in good quality blue-chip companies before the second-quarter earnings start coming in. We had a very solid first-quarter earnings season in the UAE and during the second quarter, we expect earnings momentum to be maintained. As a result you may see some sort of pull back of the market,” says Nishit Lakhotia, head of SICO, in Bahrain. “Investors don’t like such volatility as seen in Dubai and will hope that the markets become more stable. They will also continue to prefer companies with better corporate governance and transparency,” he adds.
The real story of last week, of course, lay around Arabtec. Founded by Riad Kamal in 1975, the Dubai-based contractor had already made its name working on some of the region’s most famous projects, including the Burj Khalifa and the Dubai Metro. Then, in 2012, Abu Dhabi state investment fund Aabar bought a significant stake in the firm. Kamal and other senior executives soon left, and Hasan Abdullah Ismaik, a relatively unknown Jordanian, took over as chief executive.
Ismaik’s 15 months in charge of Arabtec led to a series of ambitious announcements, including a plan to make the company one of the ten biggest contractors in the world.
Arabtec signed joint venture agreements with the likes of Samsung Engineering and GS Engineering and Construction Corp. Its backlog of work expanded enormously, doubling in less than a year. The firm then picked up a $40bn deal to build low-cost housing in Egypt in association with that country’s armed forces.
But since the big announcements were made, little has come to pass. There has been no news on whether the two joint ventures signed with South Korean firms have yielded any results – or even if any bids have been made for contracts. In addition, interviews with local media have cast doubt on Ismaik’s own experience within the construction industry.
“When I arrived at Arabtec, the first two weeks to one month were difficult for me because I did not understand things like procurement and estimations,” Ismaik told Middle East Economic Digest (MEED) earlier this year.
“But I told myself this is a challenge for me, I have to understand this business very well. This is why in the beginning I centralised everything. I needed all the managers to come to me, and when they asked me to sign something I asked them why are you doing this?
“It made me tired; I was working 16-hour days, but I learned very quickly. After three months, I knew construction better than construction people.”
Then, in early June, Arabtec’s stock began tumbling. After two weeks of speculation, ranging from whether the company was set to delist or whether Aabar was preparing to exit from its investment, the news emerged that Ismaik and the company had parted ways. But just before Ismaik’s departure, he increased his holding in the company to over a quarter, from just under a tenth. On three separate days last week, Arabtec stock fell by its daily limit of 10 percent, while a lack of communication about the company’s future strategies left analysts and investors scratching their heads. In all Arabtec lost just over half of its value in less than a month.
Speaking last Tuesday, one analyst, who asked to remain anonymous, told Arabian Business that the market could drop around 3,830 points “on a technical support level”.
The analyst said that investors did not trust Arabtec, especially after Ismaik said on TV that there was no conflict with Aabar only to resign the following day. “I don’t think anybody is believing them any more,” he said. “That damages investors’ confidence and appetite.”
As Arabtec’s share price plummeted, the falling value triggered margin calls which in turn forced investors to sell stock in other companies, pulling the whole market down.
“Yes, it started with the bad news related to Arabtec, but it’s not ending because we don’t see any complete decisions from the strategic investors, so we still see the ex-CEO coming back into the media,” says Al Mal Capital’s Qaqish. “What we would like to see is the existing strategic investors come and talk about the company’s strategy, talk about who’s going to be taking over the share of the ex-CEO.”
He says Arabec’s own ambitious expansion has also spooked investors, with considerable investment poured into expanding the company into a “big holding company”, including the addition of more divisions, with “no real implication on the ground”.
But he also says any suggestion of an Arabtec de-listing is speculation, though such a move would be bad news for the market.
“They’re [investors] talking about it. He [Ismaik] denied it, I don’t know anybody who believes it, but again there is no trust in this situation,” he says.
Last Wednesday morning, Arabtec put out a statement in the name of its chairman, Khadem Al Qubaisi, who is also chairman of Aabar. In that statement, Al Qubaisi reiterated that Arabtec would not delist and tempered further speculation by insisting that the restructuring would not tamper with existing plans.
“We have implemented a limited restructuring process, aimed at controlling resources, without compromising the needs of projects in progress and the established expansionist plans,” the statement read.
That statement appeared to calm investors, with Arabtec’s share price rising by 5.1 percent as the wider bourse recovered. However, questions still remain as to whether the regulator should have stepped in to stop trading on Arabtec’s shares, investigate whether any privileged information had been released to the market, or indeed look at whether Ismaik’s decision to take a bigger slice of the company had proved damaging. So far, the Securities and Commodities Authority (SCA) has had nothing to say on the issue.
However, Qaqish says he does not see “any legal issue” so far that would prompt the SCA to step in and stop trading on Arabtec stock.
“I don’t see something about handling the stock in terms of the fundamental base or the company – it’s all about the fact that CEO has resigned, it happens everywhere,” he points out. “The issue is that he has a big chunk of the company, which is not a good practice and [Arabtec] should have interfered earlier, especially when he was talking in the media that the share price was worth more than current levels.”
SICO’s Lakhotia declined to comment on whether the SCA should have halted trading on Arabtec stock, but says there needs to be more transparency on how stakes in a company have moved and on forward-looking statements.
“That is the need of the hour in the UAE, especially if you want foreign money to be in your market,” he says.
Gulf markets are traditionally volatile just before the beginning of Ramadan, and the jury is still out on whether last week’s collapse is a trend that will continue after the holy month. If the market stays bearish, then this could have an effect on listing plans for the rest of the year.
Having suffered a dearth of IPOs since Drake & Scull International went public in 2008, local markets have seen some companies finally step up and list in 2014. The biggest of these, Emaar’s mall unit is scheduled to go public later in the year. Is the current volatility like to affect those plans?
The National Investor’s Henin says companies eyeing stock market listings may for the time being not be deterred. “But, for sure, if the down trend continues in September maybe some IPOs might be postponed due to adverse market conditions,” he says. “So far I think we haven’t reached those levels. If the market goes down another 10-15 percent it could be true, but for the time being I don’t think so.”
If nothing else, the events of the last couple of weeks serve as a warning to the regulator, to the boards of listed companies and to investors – both foreign and international. It’s not the first warning, either, as there have been other recent incidents that demonstrate the fragility of UAE stock markets. In August last year, reports of a potential US military strike against Syria saw the DFM lose 7 percent one day, and 6 percent the next.
The Syria and Arabtec incidents show that relatively small catalysts can still have devastating short-term results.
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