Arabtec may struggle to raise profits, says Rasmala

Project delays and a higher dependency on the UAE have hit profit margins for construction giant Arabtec in 2001, investment bank Rasmala has said in a new report.

The UAE contributed about 77 percent to total revenue during the first half of the year, Rasmala said.

It added that although the company is shifting its orders from the UAE to the likes of Saudi Arabia and Qatar, both of which are seeing a rebound in their construction industries following the 2009 downturn, Arabtec would struggle to raise profit levels.

It said Arabtec's second quarter revenues and profits were below its expectations, with gross margin showing "no signs of stabilisation".

"In our view, it looks highly likely that delays in project execution and a higher dependency on the UAE are the major reasons for declining margins," Rasmala said in the report.

"We also highlight that going forward even with revenue mix shifting toward geographies like Saudi Arabia and Qatar, Arabtec may find it challenging to raise its profitability," it added.

Dubai's largest builder by market value said on Sunday its profits fell by 74 percent in the second quarter as general and administrative expenses soared.

The Dubai firm said made a net profit of AED28.9m ($7.9m) for the three months ending June 30, down from AED11.1m in the year-earlier period.

The construction major also saw revenue drop by 5.1 percent to $331m.

The company currently has a backlog of projects worth more than $4.08bn and it is increasingly looking to expand overseas to diversify away from Dubai's once-booming property sector, which has been blighted by oversupply and a lack of demand, with developers slowing or cancelling projects.

Rasmala said that until it received further company feedback on its results, it would recommend a Hold rating on the stock, with a target price of AED1.30.