Why Arabtec’s stock collapse is not good for the market

The sustained drop in Arabtec’s share price on the DFM seems to indicate that privileged information might have been leaked to the market, says Ed Attwood
By Ed Attwood
Sat 14 Jun 2014 01:35 AM

The biggest story on the Dubai Financial Market (DFM) last week was, once again, Arabtec.

Arabtec stock has been the darling of the bourse so far this year, particularly with speculative retail investors, with values rising by over three times on the back of a spate of big announcements, including a mammoth $40bn contract to build 1 million homes in a deal signed with the Egyptian army. To put the gain into context, it is outperforming the rest of the DFM — already one of the best-performing indices anywhere in the world — by six times over in the year to date. That alone makes Arabtec stock extremely susceptible to volatility.

And then we had last week’s performance. On Sunday, the stock fell by 6.7 percent, compared to an overall fall of 2.5 percent for the DFM. On Monday, it got worse, with share values dropping by 9.7 percent. That helped prod the DFM into a fall of 4.1 percent overall. On Tuesday, Arabtec dropped like a stone again, falling by the maximum allowed during a day’s trading, 10 percent, while the main index slumped by 1.6 percent.

On Wednesday, Arabtec put out a bourse statement blaming rumours “influenced by the conditions of supply and demand”, which attempted to downplay any concerns about the company’s future plans. The statement seemed to make no difference, with the stock falling by 7.8 percent, while the index fell by 0.6 percent. After trading had finished came the news that Aabar, the Abu Dhabi investment fund that has been the catalyst behind Arabtec’s vision to become one of the world’s top ten contractors, had sold down its stake from 21.57 percent to 18.85 percent.

The fact that Aabar has reduced its stake is probably — in the larger scheme of things — neither here nor there. As the company itself said, the move came from a consolidation of four Aabar units that had previously held separate holdings in the contractor. If the statements we have received over the course of the last year or so detailing Arabtec’s ambitious growth plans are to be believed, then it makes absolutely no sense for its biggest backer — ostensibly the government of Abu Dhabi — to pull out before any of those plans are realised, or even put fully into motion.

Instead, the main story here is — again — why the market appeared to know of Aabar’s stake sale so long before it was announced. Rumours are rife across any exchange, but the sustained drop in Arabtec’s share price seems to indicate that privileged information might have been leaked to the market. Investors appear to have been concerned about either Aabar selling down its stake, or of Arabtec delisting from the market altogether. While it turned out the former rumour was true, the latter may just have been a case of Chinese whispers. On Thursday morning, in a bid to stem the rumours, Arabtec put out yet another bourse statement saying it had no intention of going private.

Arabtec has some previous in this field. A couple of years ago, the company’s stock rose by 70 percent in just over two months on rumours that it had won the main contract to build Abu Dhabi International Airport’s Midfield Terminal — a deal it later announced it had indeed picked up.

But does any of this really matter? Well, at a time when the UAE has just been included in MSCI’s emerging markets index (and with Arabtec as one of the stocks selected to appear on the index), international investors are watching local markets like never before. Any hint that there might be a lack of transparency or a lapse in disclosure regulations is therefore immensely damaging.

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