Arabtec shares drop on 1 million homes setback

01 September 2015

Less commitment to project could be net positive

  • Dubai-based Arabtec Holding’s share price falls
  • Arabtec will now build just 100,000 homes in Egypt’s 1 million homes project
  • Lack of clarity on deal means failure of negotiations could be positive

Shares in UAE-based Arabtec Holding, which are traded on the Dubai Financial Market (DFM), rose slightly on opening, then fell by 3 per cent to AED1.9 (52 cents) by 1pm local time.

The fall came as a reaction to news published by MEED that Arabtec will only build 100,000 homes, or the first phase, of Egypt’s project to develop 1 million homes. Originally the developer had been slated to build all 1 million homes.

But investors are uncertain on whether news of the reduced contract will have a negative impact on Arabtec’s business, which has seen its share price fall 78.2 per cent since 1 May 2014.

“We may see the share price fall on sentiment, but without seeing the fundamentals, it is impossible to say,” says a Dubai-based equity analyst. “It depends on how the deal was structured, the terms, the fees and how Arabtec deploys.”

Few details of the deal’s terms have been announced, but analysts believe Arabtec’s profit margins in the deal were low. A smaller commitment would allow the construction firm to use more resources to deal with the rest of its AED20.2bn backlog.

The 1 million homes project is still seen as a flagship project for the developer.

“This could be make or break for the company,” says the Dubai analyst. “No one can build a million homes, but if they go into the project aggressively and payment is slow, the working capital issues could sink the whole company.”

Arabtec has been struggling with cash flow for the last year. Its last publically available results, for the first half of 2015, showed a AED998m loss. Revenues fell 4.1 per cent to AED3.6bn while expenses rose 31 per cent. Losses are also expected to continue in the third quarter.

“Arabtec has not been doing well – its expenses are high and revenues are lower,” says an Abu Dhabi-based stock market analyst. “Its current revenue profile is all upcoming projects, but it was expected to get a kick from the Egypt project.”

The firm’s stock price is not expected to recover in the near term, not least because lower oil prices and volatility in global financial markets have hit confidence in UAE bourses.

Investors are also concerned over the fundamentals of Arabtec’s business.

“Following the management changes, [Arabtec] will have some time to restructure,” says the Abu Dhabi analyst. “But the fundamentals have to improve next year or it will be punished.”

For now, investors and analysts are waiting for a statement from the developer, which might give some clarity on this issue, and the broader challenges Arabtec faces.

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