Rising from the ashes


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Makhzoumi explains how late payments from developers are more likely to affect a company's liquidity than its profitability.

Makhzoumi explains how late payments from developers are more likely to affect a company's liquidity than its profitability.

He is the CFO of the biggest construction firm in the UAE, and he has an answer for everything. Ziad Makhzoumi, CFO of Arabtec, talks to Construction Week about Nakheel payments, the Aabar deal, the BBC Panorama scandal and the company's plans for expansion.

It would be fair to say that 2009-2010 was a tough year for Arabtec. Dubai's construction industry bore the brunt of the worldwide recession and contractors across the board were left to grapple with a dramatic decline in new business and cancelled projects. But this was just the beginning for Arabtec. Dragged into a scandal about the state of its labour camps and forced to make provisions due to non-payments from struggling developer Nakheel, the firm faced a number of additional and unexpected hurdles.

"Towards the end of 2008 was when the whole market started changing," Ziad Makhzoumi, Arabtec's Chief Financial Officer explains. "There was a lot of uncertainty about what was going to happen to lots of projects that were technically awarded to the contractors in general, but were either suspended, cancelled or re-tendered in some cases.

"And you know, in construction, you're not taking on a four-week project, you're taking on a three or four-year project, and there is usually a lag time of about two quarters between signing a contract and seeing the revenue on your balance sheet." That said, Ziad Makhzoumi remains extremely confident and positive about the future. In fact, with his sights set on a number of new markets and ventures, there is no room for pessimism, and his Q1 figures are the ideal starting point.

"If you compare our first quarter [financial results] of 2009 with the first quarter of 2010," he says, "the net profits in 2010 were down 17%, but the net margin went up from 8.634% to 8.675%. That's because we are operating in new markets. If you compare the last quarter of 2009 with the first quarter of 2010, the results improved from a loss of AED 16.8 million to a profit of AED 134.5 million for the two consecutive quarters."

So how did Q4 2009 compare with Q1 of 2010? "We did not make a loss in Q1 of 2010, but we showed a loss in Q4 2009. When we finalised our accounts we thought it was very important and prudent that we take provisions when it came to certain projects, due to rumors we were hearing in the market that certain developers were expecting a discount on receivables, or to re-schedule a payment. From an accounting point of view, you have to assume that you are going to receive less."

Preparing for the worst, incidentally, is one of the things that Makhzoumi is good at. While remaining optimistic, he is open-minded about the market turning at any time, and thus, he was only slightly surprised to be awarded two new projects in Dubai worth a massive combined total of AED 1.3 billion in the first quarter of 2010 alone.

"The problem," he explains, "is that the market is continually changing, and there are so many shocks to the system that you cannot predict it. We're still going through a phase of adjustment now. It is difficult to predict on a quarterly basis what else can go wrong, what new projects will come up and start."

Indeed, one thing that Arabtec could not have prepared for was the scandal broken by the BBC's Panorama programme last April, about the poor living conditions at one of its labour camps. Having secretly filmed workers at their accommodation, the BBC claimed the camps were filthy and overcrowded. Though Arabtec officials hit back at the documentary's accusations, the question remains: has it affected the firm's reputation?
"I don't think it has to be honest. The BBC, in my view, raised an issue that should have been addressed in a different way. It was presented from a very biased point of view, in Hollywood style, it was not necessarily factual, but circumstantial. And after the BBC programme we did bring in other media who saw for themselves that most of the claims were exaggerated."

The camp in question has since been closed down, and according to Makhzoumi, his company continues to do its best to ensure that any issues within labour camps are dealt with as quickly as possible.

On track

Evidently, he is not one to dwell on the past, and is more eager to discuss Arabtec's plans to get back on track with old projects and collect outstanding payments. Collection is a key focus for the year ahead, and follows a particularly challenging year in which the company witnessed a cycle of slow down on collections, as developers struggled to keep up with regular payments.

Particularly newsworthy has been the ongoing quest for payment between Arabtec and Nakheel. After months of speculation over how the cash-strapped property developer was going to pay back its AED 91 billion debt, followed by proposals to pay its trade creditors 60% in Islamic bonds and 40% in cash, the developer has only recently announced plans to pay Arabtec before the end of June.

"We have signed an agreement with Nakheel that confirms it will pay us before the end of June and I have no reason to doubt that that will happen," says Makhzoumi.

Evidently, the impact of late payments on cashflow has caused the most problems for Arabtec during the recession. As well as threatening its plans for expansion, a lack of liquidity has increased the need for the company, along with most other contractors, to borrow money. "Profitability is not necessarily influenced by collection, it's more likely to affect your liquidity," Makhzoumi explains. "A year and a half ago, we had much more money in the bank. Sometimes we need to borrow money and sometimes we don't, it depends on the projects. Then there's the cost of finance - if you're not borrowing, you don't have to pay interest charges."

But liquidity issues are not going to stop Arabtec from growing, and the CFO is adamant that late payments have not affected Arabtec's relationships with its developers. On the contrary, he believes it is essential to work together during rocky economic times and that Arabtec's relationship with Nakheel particularly is a good one. "We have a good relationship with Nakheel, we haven't had a bad relationship with anybody."

It is with this forward thinking approach that Arabtec hopes to resume work on Nakheel's Al Furjan project in the near future, the company never having actually left the site, and payment prospects looking up.
"With Al Furjan you have to be aware that there are different stages. We have been paid for some of the work we have done. There were delays in payments, but it was never a major issue per se, as everybody was going through a cycle of slow down on collections. In the future we hope to do some more work for them."

Unfortunately, the Meydan project, is according to Makhzoumi, "a different issue." Arabtec worked on the project as part of a 50/50 JV with Malaysia's WCT before the contract was cancelled, reportedly due to WCT's failure to abide by the time schedule for the completion. Makhzoumi declined to comment on the issue, except to say that Arabtec was "going through the proper channels" to resolve the dispute.

Of course, restarting stalled projects is just one of the firm's objectives for the year ahead, the other, perhaps a more important one, is to expand into new markets. Initially a UAE-based firm, Arabtec is currently growing its portfolio of projects in Jordan, Russia, Saudi Arabia, Qatar, Syria and Palestine, and has bid for work in Algeria, Angola, Egypt, Libya, Lebanon, Turkmenistan and Azerbaijan, where executives believe they can expand and add value.

It was with a view to such expansion that Arabtec tried for a merger with Aabar. Then, out of the blue, Arabtec's plans to sell a massive 70% stake to the Abu Dhabi-based investment firm were suddenly called off. Everybody wants to know why.

"I do not want to talk about Aabar," Makhzoumi replies, "except to say that both parties have reviewed the situation and have agreed that the deal proposed is not the right solution at the moment."

But in turn, this only begs the question: how does Arabtec intend to finance its expansion? "Money wasn't the only reason for wanting to join up with Aabar," he explains. "The relationship would have been strategic, with a financial element. It would've opened up new market and partnership opportunities, and besides," he goes on, "if you get your cycle right and you get your suppliers to give you some credit time, in theory, you need very little cash to start major projects."

Or at least, this is the case when it comes to government-backed, infrastructure projects in developing areas, which have attracted the attention of developers and contractors.

"There is a misconception that construction is purely high rise buildings and hotels. It is not," says Makhzoumi. "There are lots of projects coming up that are not just residential or building a tower."
Saudi Arabia in particular, requires a massive US $ 2.4 trillion-worth of infrastructure work according to reports. From roads, airports and desalination plants, to hospitals, schools and universities, the country is investing in a huge quantity of projects to cater for its fast-growing population.

Undeniably, for Arabtec, it is this huge demand for infrastructure projects which makes the oil and gas producing countries so attractive. This, alongside the fact that projects are characterised by a shorter life cycle, strong government backing and plenty of available funding.

"Governments have to spend on building infrastructure," says Makhzoumi, "so in theory, the bigger chunk of development is infrastructure projects coming from the government. This will continue to be the case in these oil and gas producing countries where the government is the owner of that revenue and the spender of that money." He adds: "And, as long as the funding is there and the project is important and not cancelled or suspended, there is no reason why the client will not pay."

In summary, he states that each of these markets has two attractive features: "One is that they need a lot of work to be done, and possibly more [than anticipated] if they want to open up for tourism, but most of all, they have the revenue to fund those projects."

Having already won a number of contracts in such areas, including part of the Princess Noura University in KSA, worth AED 1.5 billion, plus a further two projects in Qatar in the first quarter, it would seem that Arabtec is progressing well with its growth strategy. However, in areas where it has only recently bid for work, such as Libya, Algeria and Turkmenistan, competition with equally-ambitious contractors from America, France and the UK will be tough.

"Our subsidiary company Target Engineering is well known for its capabilities in oil and gas and infrastructure work, and we also have Arabtec Engineering Services which does a lot of preparation work. So while we're publicly known for developing iconic buildings, the range of services we provide is beyond building big towers."

Also important, he adds, is the ability to understand these new markets, each of which has different requirements, be it culture, language, the nationality of workers or the things you are not permitted to do. "There are lots of good companies in Europe and America," Makhzoumi says, "the question is: who can go over there and deliver and be patient enough to understand the system. There are lots of logistic considerations when you enter a new market. Staff need to be capable, they need to speak the language. We employ over 60,000 people who among them speak 20-25 different languages."

And of course, he says, there is also the possibility that a government throwing tens of billions of dollars worth of work at contractors will not want to give it all to one company. Proof that Ziad Makhzoumi never misses a trick.

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