Arabtec: Cementing a new future

Dubai’s largest listed contractor has recorded losses for six consecutive quarters. But Raja Hani Ghanma, CEO of its construction subsidiary, explains how the company is gradually building back up to profit
Arabtec: Cementing a new future
By Neil Halligan
Fri 17 Jun 2016 09:15 AM

More accustomed to bricks and mortar, the UAE’s largest listed contractor has been busy rebuilding itself of late. But, finally, there are real signs of green shoots for Arabtec.

“Things are looking much better,” says Raja Hani Ghanma, CEO of Arabtec Construction.

The increasingly positive outlook follows a $640m loss in 2015, despite scores of healthy contract wins.

Revealing the disastrous results in April, Arabtec Holding chairman Mohamed Al Rumaithi warned that 2016 would be another “tough” year, but he remained confident that the $1.76bn company would return to profit by 2017.

Arabtec recently hired restructuring advisory firm AlixPartners to help it strengthen its capital structure and reform its business.

But reform will take time.

In its most recent results announced in May, Arabtec posted its sixth successive quarterly loss and was forced to tap into its statutory reserves, using $272m to wipe out some of its accumulated losses.

It was not all bad news, however. The first quarter loss of $12.6m was an 83 percent improvement on the $76m loss reported in the same quarter 12 months previously. Revenues also increased, up 8 percent to $517m, and Arabtec secured contracts worth $1.8bn during the first three months of the year.

“We have tried to focus on our core business and I think we have been successful to a large extent in doing that,” Ghanma says. “We have managed to pick up some serious work in the last six to seven months.

“Overall things are looking good for Arabtec. I am personally very optimistic about our future. We still have a lot of work to do; we’re not finished with our restructuring and consolidation plans yet. Obviously those things take time.”

When Ghanma was appointed CEO a little over a year ago, he was given a clear mandate from the board to streamline operations and to “cut the fat”.

It took Arabtec and its partners 47 months to build the 828 metre-tall Burj Khalifa.

“This is an ongoing process and will continue for some time,” he says.

Part of the process involves disposing of Arabtec’s non-construction businesses. 

“We have certain subsidiaries that were not actually key to our construction business. They might be related one way or another, but they’re not 100 percent related. There were some that were totally unrelated to hardcore construction,” he says.

“At one point we were actually eyeing developments, for instance, and the past management [talked about] getting into our own developments. We have actually put that on the back-burner. We are focusing on contracting and building, in particular. We had opened a division for education but that has been scrapped.”

On the chopping block is likely to be Arabtec’s construction equipment business, which Ghanma says is not relevant to the firm’s core business.

“You can buy and rent equipment from the market,” he says.

“We have financial experts who are working on recommendations on how to structure the business. Once those reports are finalised, they will be presented to the board, then the board will make a decision.”

Ghanma says Arabtec’s immediate future lies in contracting and that will remain its core focus. It is also where the Dubai-listed company has had its most success. In a joint venture (JV) with Samsung, Arabtec built the world’s tallest building, Burj Khalifa, for Emaar Properties. Working with the Dubai developer has been an important partnership, Ghanma says.

“Emaar is a very important client for us and we have a close association with them. We go back to the very first days that Emaar started. I think we were very much part of the Emaar success story. We have built more projects for Emaar than any other contractor, particularly when it comes to villas.”

Emaar has announced plans to build a tower 100 metres taller than the Burj Khalifa and Arabtec is considered a strong contender for the contract when it comes up for tender.

“If the opportunity arises, by all means, yes,” Ghanma says, when asked if Arabtec would submit a tender, but adds there have not yet been any discussions on the Dubai Creek Harbour-based project.

A project that size would require a revival of the Samsung joint venture, which Ghanma says still exists, but has not been active in recent years.

“It’s still there and when the opportunity arises, it can be put into effect. At the moment there is nothing specific that has materialised [but it has not been cancelled,” he says. “Obviously it has to be a well-sized project to justify a strong JV to go at it.”

There are also strong ties with Abu Dhabi-based developer Aabar Investments, the largest shareholder in Arabtec Holding, with a series of completed projects recently handed over, including Najmat, a 23-storey residential tower on Reem Island, and Saraya One and Two, high-end residential towers on the Abu Dhabi Corniche.

Ghanma says Arabtec is in ongoing talks with Aabar “about several other potential jobs”. But a memorandum of understanding worth more than $6bn to build 37 towers in Dubai and Abu Dhabi, which was signed in February 2014 when both companies were under different leadership, appears to have been shelved.

Arabtec’s plan to build 1 million homes in Egypt, also revealed under previous management, is at risk of being shelved, as well. Originally valued at $40 billion, the proposed project has been significantly cut back and Arabtec is yet to receive any confirmation of support from Egypt’s housing ministry, despite mooting the idea in October 2015.

“We haven’t heard from them since. We went there with a specific proposal to start off with 13,000 units and we set certain criteria and requirements,” Ghanma says. “I can’t say it’s totally a dead horse because it can come back any minute, but obviously it has shrunk from what it was. Nobody is talking about a million unit project; we’re [now] talking about 100,000 units. We said we will start off with 13,000 and we gave a proposal on how that is to be done.

“The Ministry of Housing did not come back to us. They might not be interested, I don’t know.”

Arabtec still has a strong operation in Egypt and hopes to grow it further, whether the huge housing project materialises or not.

It is also looking to develop its business in Saudi Arabia, another booming Gulf state that desperately needs tens of thousands of homes, as well as other buildings. Arabtec already has two operations in the kingdom.

The most prominent was signed in 2009, establishing a joint venture with CPC Services, a member of the Saudi bin Ladin Group, and Mawrid Holdings, another Saudi-based partner. But the partnership has suffered in recent months, with Arabtec also becoming a victim of the much publicised issues associated with the Bin Ladin Group, including late payments.

“We are now trying to find ways on how to solve the issues with that joint venture through the mediation of the third partner, Mawrid Holdings,” Ghanma says, having recently returned from Jeddah, where he discussed how resolve the issues. He says he is hopeful a resolution can be found.

Ghanma has called for a standard contract across the GCC, setting out terms fairly and impartially.

Arabtec Construction also has its own operations in the kingdom, including winning a $283m contract to build 380 villas for Saudi Aramco in Eastern Province.

“Saudia Arabia is a huge market,” Ghanma says. “We feel we have something to offer, particularly on the housing side. Arabtec is very strong on housing and in Saudi Arabia there is a need for a strong housing contractor and we feel that the market has a huge demand still.”

Elsewhere in the GCC, Ghanma says there are “lots of things in the works”, but nothing concrete yet.

Earlier this year, Arabtec was awarded, in partnership with TAV Construction, a contract to build Bahrain’s new $1bn airport terminal.

“I’m very excited about Bahrain; we’re still eyeing several opportunities in Bahrain,” Ghanma says.

He adds that operations in Kuwait, Qatar and Jordan remain strong, while further afield in Kazakhstan, Arabtec is constructing what will be Central Asia’s tallest building, Abu Dhabi Plaza. It is “a massive project”, Ghanma says.

Arabtec also has a base in Delhi, India, from where it plans to expand across the country.

“We are quite hyped up about that market and we think there are good prospects for Arabtec. There is something for Arabtec to offer that is not there in the widespread Indian market, in terms of the added advantage of quality work with using modern techniques,” Ghanma says.

But Arabtec’s Gazprom Tower in St Petersburg – also known as Lakhta Centre – did not work out as planned. Due to be Europe’s tallest tower, the 463-metre high building was expected to pave the way for Arabtec to take on more projects in Russia. But Ghanma says after initial problems with location were resolved and Arabtec completed enabling works, the firm hit more problems.

“We couldn’t get an agreement with the client ultimately for the superstructure, so that job is no longer with us; somebody else is doing it,” he says. “We did the first part of it and we’ve settled the accounts and everything.”

Despite an industry-wide issue of delayed payments, Ghanma says Arabtec has had few issues.

Arabtec is part-way through dozens of projects from hotels to stadiums.

“We are getting paid and to a large extent we get paid on time,” he says. “We’ve had a bit of a problem getting paid for our subcontract work with the Saudi Bin Ladin Group, but that’s a one-off because we’re not dealing directly with the government; when we’re dealing directly with the government in Saudi Arabia we’re being paid promptly and on time.”

He blames payment difficulties on delays caused by a lack of planning at the beginning of a project.

“We’re spending a lot of time sitting on the drawing board and going through all the engineering details before we start execution,” he says. “It’s something I’d like to encourage in the industry - that people spend more time on the engineering side before they start the execution, because most of our problems in this industry are that clients and their designers have not actually spent enough time coordinating the drawings, understanding and making sure that what they come up with is what the client is looking for.

“You will find in this part of the world that most of this happens while you’re executing the work and that naturally leads to all sort of problems.”

Ghanma says he would like to see a standard form of contract – possibly drawn up by the region’s contractors’ association – introduced across the GCC, setting out terms fairly and impartially.

Avoiding these pitfalls along the construction phase will potentially be a significant part of Arabtec’s current cost saving exercise, as it strives to break-even by the end of the year.

While the advisers are continuing to determine how the company should restructure, Ghanma says the end goal is clear. “We certainly want to get into positive territory. We can’t afford to keep bleeding.”

The firm will also be far more selective in its project choice, he says.

“We have sufficient backlog to keep us very busy. We are being extremely selective now in which projects we take on board. We are not just going flat out trying to grab just about anything. We have to be selective in what we pick up and make sure that this is both financially viable and strategically important for us as a company,” Ghanma says.

“The projects that we secured in Q1 were good projects, that means healthy in terms of the margins they have, given the competitive world that we are in today.”

Indeed, just how well Arabtec manages those bricks and mortar projects will determine the strength of its own rebuild.

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