A new chapter for Arabtec

26 September 2013

The UAE-based contractor’s new shareholders are transforming the company by diversifying into other project sectors through joint-venture partnerships

It has been a watershed year for UAE contractor Arabtec Holding. The defining moment came in April when the company signed an agreement with South Korea’s Samsung Engineering to form a joint venture called Arabtec-Samsung Engineering.

The new company was officially formed on 24 September at a ceremony at Samsung Engineering’s global headquarters in Seoul. It will now proceed to prequalify for projects and bid for new work across the region, with a priority given to large-scale oil and gas, petrochemicals, industrial, and power and water projects in the GCC.

New owners

The joint venture stunned many in the construction industry. Most assumed that when Abu Dhabi’s Aabar Investments took control of Arabtec in 2012, the company, which had struggled to grow since the construction downturn began in late 2008, would effectively become Aabar’s in-house contractor for its numerous real estate developments.

The launch of this company is a major milestone in our ambitious strategy to expand into new areas

Hasan Abdullah Ismaik, Arabtec Holding

That assumption was wrong and Arabtec quickly began filling its order book with work from other clients in Abu Dhabi. Last year, the company was part of a consortium with Turkey’s TAV and Athens-based Consolidated Contractors Company (CCC) that won the $2.85bn contract to build the Midfield Terminal building at Abu Dhabi International airport.

This year, it won the $653m contract to build the Louvre museum in joint venture with Spain’s San Jose and the local affiliate of Saudi Oger, along with the $272m contract to build the Fairmont hotel development.

Arabtec financial performance, 2012
Gross profitAED575.6m
Gross margin10 per cent
Net incomeAED188.2m
Ebitda=Earnings before interest, taxes, depreciation and amortisation. Source: Arabtec

While the new work was rolling in, even more significant changes were being quietly planned. Rather than relying almost entirely on the increasingly competitive construction sector with its slim margins, Arabtec’s new shareholders decided to target other sectors that would deliver robust growth, drive up the company’s share price and produce strong dividends.

The oil and gas, power and infrastructure sectors in the Middle East were identified as key drivers for long-term economic growth. The problem before the joint-venture agreement was that the scale of the projects meant Arabtec’s options were limited to building for smaller construction packages to be executed by its subsidiary, Abu Dhabi-based Target Engineering.

The management also realised that making the leap to $3bn-10bn engineering, procurement and construction (EPC) contracts could not be done alone; it needed a partner. That partner was to be Samsung Engineering. One of the region’s most active EPC contractors, Samsung has a backlog of about $10bn, and, like Arabtec, is keen to increase its presence in the Middle East.

The Arabtec management says that with a proven track record and the opportunities for new EPC work leading up to 2017, Samsung was the right partner at the right time.

“The launch of this company is a major milestone in our ambitious strategy to expand into new areas, in association with world-class partners, as part of our endeavour to consolidate our status as a key player at the regional and international levels,” says Hasan Abdullah Ismaik, managing director and chief executive officer of Arabtec Holding.

While the agreement signifies the start of a new chapter in Arabtec’s history, it also marks the end of a decade-long period that saw Arabtec grow from being a local Dubai-centric contractor into a regional powerhouse for general contracting.

Long history

Although the company was formed in 1975, its modern history began in early 2004 when the management revealed that Arabtec was going to list on the Dubai Financial Market. The decision ended months of speculation about its future, including reports it was looking for new investors.

The timing was perfect. It gave Arabtec access to new capital that allowed it to take advantage of Dubai’s rapidly growing construction sector. With a strong capital base and an ambitious management team, the contractor began winning work on major building projects.

In April 2004, Arabtec won a $450m contract to build 13 towers on the Jumeirah Beach Residence development. The project was the largest building project in Dubai at the time and turned the firm into one of the emirate’s largest building contractors.

Arabtec key conracts awarded in 2012
ProjectCountryContract value (AEDm)
Midfield Terminal building, Abu Dhabi InternationalUAE3,600
Phase 2, Msheireb Downtown DohaQatar2,300
Fairmont Abu Dhabi Hotel and serviced appartments*UAE1,100
Louvre Abu Dhabi Museum**UAE800
Structural works at Dubai International airportUAE560
Enabling works, Lakhta Tower, St PetersburgRussia450
411 villas in Baniyas residential developmentUAE425
Nile Towers, CairoEgypt275
Najmat residential development, Abu DhabiUAE225
95 villas and townhouses at Arabian Ranches, DubaiUAE110
*=Announced February 2013; **=Announced January 2013. Source: Arabtec Holding

The Jumeirah Beach Residence deal was just the start of a good year for Arabtec. In December 2004, the company was part of a consortium with South Korea’s Samsung C&T and the local/Belgian Belhasa Six Construct that secured the $875m contract to build the Burj Dubai. Now known as the Burj Khalifa and at 828 metres, it is the world’s tallest building by far.

The timing of the award was perfect as it came just before an initial public offering and meant Arabtec had become one of the largest building contractors in the region and, as the largest listed construction company, the most high profile.

As Dubai’s real estate developers kept launching new projects, Arabtec’s client list and project portfolio grew. It was working on scores of high-rise towers and thousands of villas for clients such as Emaar properties, Dubai Properties, Deyaar Development, Damac Properties and Zabeel Properties.

Then came Arabtec’s largest Dubai project: the $1.3bn contract it was awarded, in joint venture with Malaysia’s WCT, to build the 60,000-capacity grandstand at the Meydan racecourse development at Nad al-Sheba. The project was a step too far and in 2009 the joint venture stopped work on the scheme after its contract was cancelled by the client, Meydan.

The $954m contract dispute that followed failed to make significant progress for four years, until earlier this year when Arabtec and Meydan finally decided to reach an amicable decision outside the courts of law.

Refocused strategy

This dispute highlighted the problems that Arabtec faced following the downturn in construction activity in Dubai and the frailty of its business model that relied heavily on work from private developers in the emirate.

The impact would have been worse had the company not started to expand into new markets in the GCC, such as Saudi Arabia, Qatar and Kuwait, together with markets elsewhere in the region, such as Egypt, and beyond that in Central Asia, including India, Russia and Kazakhstan.

Rather than expanding further overseas into markets with unknown risks, Arabtec’s move into the EPC sector will allow it to avoid the pitfalls of the past by diversifying its portfolio, while still working in a region it knows and understands.

Arabtec-Samsung Engineering is just the beginning. Other sectors are also being targeted to tap into new markets and revenue streams. The company plans to form another joint venture with a partner for large-scale infrastructure projects, such as metro systems and ports, areas in which Arabtec does not traditionally have a strong presence.

In numbers

$2.85bn: Value of contract won by Arabtec-TAV-CCC consortium for the Midfield Terminal building

$653m: Value of contract won by Arabtec and Spain’s San Jose to build the Louvre museum

CCC=Consolidated Contractors Company. Source: MEED

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