Villas are an opportunity for Arabtec to trade out of trouble

28 January 2016

Dubai-listed construction firm has a strong track record and specialist technology

Since May 2014, Dubai-listed Arabtec Holding has endured a torrid time. The construction company has been reporting heavy losses and its share price has fallen 83 per cent from a high of AED6.84 ($1.86) in May 2014 to AED1.15 on 28 January 2016.

Before May 2014, Abu Dhabi-based investment vehicle Aabar Investments played an active role in managing and promoting the company, with Aabar executives Hassan Abdulla Ismaik as CEO and Khadem al-Qubaisi as chairman. Following their departure, Abu Dhabi’s control of the firm has been low profile, leaving many to question what the future holds for the company.

Arabtec’s problems are sizeable. Its costs have spiralled upwards and it is struggling to complete a substantial backlog that includes challenging projects in Abu Dhabi as well as foreign markets such as Kazakhstan, where it is working on the Abu Dhabi Plaza development in Astana for Abu Dhabi-based developer Aldar Properties.

New work had also slowed. Some respite came in January when is secured an order of AED2bn from Aldar for the construction of 1,017 villas on Yas Island.

According to sources close to the project, Aldar was reluctant to award Arabtec the work due to delays on the Astana development, but after a prolonged evaluation period, proceeded to give it the contract.

The decision is a crucial one for Arabtec. The backdrop of a slowing market means that cashflow is more important than ever, and large order from a client with solid finances should guarantee that money is pumping through the business.

For Aldar, the move should not be as risky as they may have initially feared. Arabtec has a strong track record when it comes to building villas in the UAE.

Sources that have worked with the company say Arabtec has a well-established tunnel-form technology for mass producing villas that has been used for major building projects in Abu Dhabi and Dubai.

In Abu Dhabi, it was awarded a contract to build 411 villas at the Baniyas Residential development in 2012, and in Dubai it has built thousands of homes for clients such as the Mohammed bin Rashid Housing Establishment, Nakheel, and Emaar Properties.

The obvious solution for Arabtec and its Abu Dhabi owners would be for the contractor to focus on building villas, as it would give Arabtec cash flow, while delivering new homes in the UAE capital.

The problem is that Abu Dhabi’s housing requirements may not be sufficient enough to give Arabtec the cash flow it needs. About 14,500 homes were announced for the emirate as part of the 2030 plan, and most of these have already been delivered.

The solution could be to export this business model in markets outside the UAE where there are still significant new housing requirements.

In 2014, Arabtec signed a development agreement for 1 million new homes in Egypt, but failed to result in construction work for Arabtec. The company has achieved more in Saudi Arabia, where it has secured contracts for the construction of villas for clients such as national oil company Saudi Aramco.

With the housing minister saying that Riyadh needs to build 1.5 million new homes over the next six to seven years, Saudi Arabia could be the opportunity Arabtec needs if it is to trade its way out of the problems it has been struggling with.

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