Rising stock

Arabtec's Riad Kamal has just got off a flight from St Petersburg with a smile of a cat who's got the cream.
Rising stock
By Sean Cronin and Tamara Walid
Thu 01 May 2008 04:00 AM

Burj Dubai builder Arabtec made headlines around the world last year when 30,000 workers went on strike over pay, bringing building sites across the emirate to a standstill.

So why has the company founded by Riad Kamal become one of the best performing Arabian Gulf stocks of the last year?

Riad Kamal has just got off a flight from St Petersburg and is wearing the broad smile of a cat who's got the cream - in the form of a US$2.7bn contract to build a skyscraper for Russian energy giant Gazprom.

It is the largest project ever awarded to Arabtec, the UAE contractor building the world's tallest tower that has become the darling of the local stock market with a share price that has risen a staggering 260% in the last year - 30% of that in the last month alone.

Today the company he started 34 years ago is worth more than US$2.7bn. Its stock is covered by analysts from Morgan Stanley to Goldman Sachs, and it has gained worldwide exposure from its Burj Dubai project.

Hard to imagine that this is the same company that suffered the biggest worker walk-out in the history of Dubai last November when around 30,000 of its employees downed tools to protest over their pay, some of them refusing to return to work for three weeks.

The strike made headlines around the world and sent Arabtec stock diving.

But it was only a temporary retreat and less than six months later, the UAE's only publicly traded construction company continues to beat analyst profit expectations and has bagged the biggest skyscraper contract to have been awarded anywhere in the world so far this year.

Kamal has come a long way since working as a site engineer on a steel plant in the northern British city of Scunthorpe back in the swinging 60s, after graduating from Imperial College London in 1965.

Today the company he started 34 years ago is worth more than US$2.7bn. Its stock is covered by analysts from Morgan Stanley to Goldman Sachs, and it has gained worldwide exposure from its Burj Dubai project.

Kamal got his big break back in 1974 when he convinced a group of seven investors to let him manage the construction of what was then the biggest and tallest building project in Dubai - at just 17 storeys and worth only US$6.8m, it seems hard to believe that he is talking about the same emirate.

The project was a success and Arabtec was born with a start-up capital of about US$545,000.

It led to other building jobs in Dubai, Sharjah, Al Ain and Abu Dhabi throughout the early 1980s. Kamal bided his time until 1988 when Dubai's building industry was at its lowest ebb.

He offered to buy the shares of his co-investors and they were happy to sell. He doesn't disclose what he paid his seven erstwhile partners for their stakes, but it seems clear that it was at a substantial discount to the US$385m that a one-seventh stake in Arabtec would be worth today.

"I'd hate to think what they think about it now," he says with a chuckle.

Kamal claims not to be interested in the movement of the company's stock.

"I don't spend too much time following the share price. We chase the jobs and our company is in a growth phase so it is only natural that our results are going to be better, and that will obviously be reflected on the share value," he says.

His nonchalance is unconvincing though. With 10% of Arabtec stock, his personal shares are worth in excess of US$270m.

The Gazprom contract was a particularly spectacular rabbit to pull out of the hat for Arabtec, which was already riding high from a Morgan Stanley note in early April that said the company's fair value was AED18.87 when it was trading at just AED11.62.

It was a massive upgrade for the stock from a big-name bank and it triggered an investor feeding frenzy on Arabtec shares.

The stock upgrade was in response to Arabtec's acquisition of Target Engineering, a relatively small Abu Dhabi-based contractor which gave the company access to the potentially lucrative oil and gas sector in addition to its mainstream building work.

"Arabtec's revenue growth and net profit margin have exceeded expectations. Essentially investors and the market see that the company today is well-managed, operating in a growing construction market with demand for contractor capacity exceeding available capacity," says Shuaa Capital analyst Roy Cherry.

"They are betting on the company's ability to expand capacity, organically and inorganically.

The Russian contract will help Arabtec do just that - opening up a vast and potentially lucrative new market for the company.

The company beat Russian and European rivals to win the contract to build a 400-metre tower and five other buildings that will form the ‘Okhta Centre' in the city of St Petersburg for Gazprom Neft, the oil unit of the Russian national gas company as well as the City of St Petersburg.

To win a project like this in competitive tender and on foreign turf was a coup for Arabtec, particularly as the value of this single project is the equivalent of the company's entire market capitalisation.

But the award also represents a big risk for the company in a market that is notoriously difficult for outsiders. Limitless, the Dubai-based government-owned developer was forced to abandon a planned US$11bn project in Moscow last year without disclosing the reasons behind its withdrawal.Kamal acknowledges that he thought long and hard before bidding for such a large project in a market where the company has had no prior experience.

"We have been very fortunate in that we have an absolutely top-class client like Gazprom, as well as the City of St Petersburg," says Kamal. "I would hope that we can maintain our operations at that level."

Arabtec scooped the Russian project in large part because of the international exposure it has gained from building the world's tallest tower in Dubai, in a joint venture with Korean contractor Samsung and Belgian outfit Besix.

We have been very fortunate in that we have an absolutely top-class client like Gazprom, as well as the City of St Petersburg.

"I have no doubt the Burj Dubai helped a great deal in putting us on the global construction map and I'm always flattered when I meet people overseas who know of us through our Burj Dubai exposure," says Kamal.

He adds "The execution of the job has been good even if there are hiccups along the way - every job of this size will have those."

One such hiccup threatened to develop into something far more serious last November when Arabtec was hit by a massive protest involving around 30,000 of its workers who went on strike over their pay.

The workers' pay grievances grew throughout 2007 as the weakening dollar meant the money they sent home was worth less when converted into rupees, the home currency of the majority of foreign construction workers in the UAE.

Other Dubai-based contractors were also hit by worker walk-outs but none on the scale of that Arabtec faced, which threatened to delay the world's most high-profile building project.

"In my opinion it was unnecessary - they should have just come to us and aired their grievances - it was a wage grievance," he says, acknowledging that the company could have handled the situation better.

"The whole thing opened our eyes in that dialogue [with the workers] should be continuous and now we have put in place a mechanism where management is in constant touch with the men, to make sure there are no more grievances that would trigger such events as we saw last year," he says.

"We didn't want to act alone, so we called on other contractors to discuss this through the Contractors Association and look at how we could compensate workers for the falling dollar.

The upshot was that Arabtec increased its wage bill by about 18% and the men returned to work. The pay hike was a lot to absorb in one hit for the construction company that is under increasing cost pressure in its home market.

It has encouraged Arabtec to seek more work from overseas - which it hopes will generate as much as 30% of its business by 2010.

As part of that push, Kamal has taken Arabtec into Syria, Pakistan, Jordan and Qatar, in most cases following its biggest client, Emaar Properties, the Dubai-based developer of the Burj Dubai and the largest real estate company in the Middle East and North Africa.

Next on the agenda will be Saudi Arabia, where Kamal sees huge potential for Arabtec to grow its order book.

New markets also offer the potential for Arabtec to improve its operating margins, which are coming under increasing pressure in the UAE's construction cauldron where the cost of labour, steel, cement and many other products has rocketed over the last year.

Kamal is scathing of the suggestion that cement companies are suffering under the load of their higher input costs and price caps, and accuses them of reneging on their pricing commitments to his company.

"I believe the cement companies are doing very well - you only have to look at their results. I agree they are paying higher costs for diesel and operatives, but in the majority of cases they have compensated for that in the increase of their prices," says Kamal.

Arabtec has calculated that its construction costs have risen by 30% in the year to January 2008, perhaps as high as 40% if that comparison is extended to this month, according to Kamal.

He says that Arabtec's profit margins have remained unchanged despite the volatility in the market and rejects the suggestion that real estate developers may have the same attitude towards him as he does towards the cement companies.

"I don't accept that - we have not increased our margins by 30% or by any percentage, in fact.

"We have maintained our margins over the last three years and we work on an open book basis. Anything we do today is within a fixed margin that does not exceed 8 to 10%.

Soaring costs aside, Kamal is looking forward to Arabtec revenues that could top US$2.2bn in 2008. So when will he eventually hang his hard hat up?

"I get asked that question every year, and each time I say next year," he smiles.

With the contract in Russia about to start and operations in Saudi Arabia poised to take off later this year, it seems unlikely that the Arabtec boss will be retiring any time soon.

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