had performed well over the past few years and has grown at a rapid pace. However, with significant slowdown in the real estate and construction sector, we expect the growth rate to slow down considerably from 2009 onwards. We estimate the top line of Arabtec to decline in 2009 and post a modest growth rate from 2010 onwards. Dubai, which is the main market Arabtec, has witnessed a slew of project cancellations and delays. Even though Arabtec has started to increase its reliance on other markets like Saudi Arabia, Qatar, Abu Dhabi and also outside of GCC, it will be difficult for the company to compensate for the project cancellations in Dubai. Arabtec has estimated that more than 50 per cent of its revenues will come from outside Dubai over the next three years.
The value of Arabtec’s shares derived from the weighted average of the DCF and peer comparison methods is AED4.15 per share. The stock currently trades at AED2.91 (as on 5th Aug 2009), which implies that the weighted average value of Arabtec’s shares is at a premium of 42.6% to the share’s current market price. We, therefore, recommend a ‘BUY’ on the Arabtec stock, at its prevailing price levels.
Financial Performance
Arabtec’s total revenues were AED9.72bn for the year ended December 2008. On Y-o-Y basis, the revenue was up by 127.5 per cent during 2008. The growth in the revenue came on the back of booming construction activity in the region. However, the construction sector started to show signs of weakness towards the end of the year because of economic slowdown.
Direct costs for the year were AED8.23bn, growing by 132.9 per cent on Y-o-Y basis. Gross profit for the year amounted to AED1.49bn, growing significantly by 101.9 per cent on Y-o-Y basis. Gross profit margin declined to 15.3 per cent in 2008, down from 17.3 per cent in the previous year. Gross profit margin of the contracting was 13.2 per cent in 2008, down from 16.8 per cent in the previous year. The profit margin of Arabtec has come under pressure because of slowdown in property sector and subsequent negotiations by developers.
Operating profit during the year was AED1.07bn, with an operating profit margin of 11.0 per cent as compared to operating profit margin of 12.7 per cent in the previous period. The decline in gross profit margin was reflected in lower operating margin. The increase in staff expenses also impacted operating margin. Net profit during the year was AED958.0mn, with a net profit margin of 9.9 per cent as compared to net profit margin of 12.5 per cent in the previous year. The company did not declare any declared cash dividend for the year.
The company had operational revenues of AED3.92bn in the first six months of 2009, down 5.9 per cent Y-o-Y. The revenues declined because of project cancellations and deferments in Dubai. The total direct costs of AED3.27bn were down 5.2 per cent Y-o-Y. Gross profit for the period was AED643.9mn, down 9.6 per cent Y-o-Y, for a gross profit margin of 16.4 per cent, against 17.1 per cent a year ago. Decline in profit margin, which was earlier witnessed in the second half of 2008, continued in 2009 as well.
Net operating costs of AED216.3mn were up 33.4 per cent y-o-y, leading to an operating profit margin of 10.9 per cent, against 13.2 per cent a year ago. The interest expenses during the period jumped manifold compared to the corresponding period in the previous year. This was mainly due to significant increase in bank borrowings by the company to finance its working capital. The company’s net profit during the period of AED345.1mn was 31.6 per cent lower than that in the corresponding period of 2008.
Outlook
The company’s management has reported the total order backlog of AED28bn at the end of 1H-2009. This however includes Okhta Centre project in Saint Petersburg, Russia worth AED10bn, which has not witnessed any significant progress. Excluding Okhta Centre project, the biggest project currently executed by Arabtec is Al Wa’ab city project in Qatar. Over the past months, Arabtec has won projects like National Towers project in Abu Dhabi and Princess Noora University project and Lamar Towers in Saudi Arabia. It is becoming apparent that Arabtec is increasingly focusing on markets outside Dubai to counter the slowdown in its home turf.
We estimate the profit margin of Arabtec to come down because of renegotiation of contracts due to slowdown in the sector, growing competition, higher provisioning on receivables as well as higher interest cost. The debt level of Arabtec has shot up sharply during 2008, which is a cause of concern. In fact, the debt to equity ratio has reached 0.66 at the end of 2008, up from 0.24 in 2007 and therefore has resulted in a huge jump in interest cost.
Another important issue facing Arabtec is the working capital level, which has gone up sharply. The receivable level was significantly high during 2008 since developers are struggling to make timely payments because of cash crunch. The inventory level has also gone up rapidly due to higher steel inventory. High receivable and inventory level has resulted in company extending its payment term to suppliers and sub-contractors as well as resorting to short-term financing. Even though working capital levels have come down during 1H-2009, it remains a challenge for the management.
Table: Investment Indicators
Price Aug 05, 2009 Shares in Issue ('000) Market Cap 52-week price range (Lo/Hi)
AED2.91 1,196,000 AED3.48bn AED0.76-AED8.58
Year Total Revenue (AED mn) Net Profit (AED mn) EPS (AED) Book Value (AED) ROAE P/E (x) P/BV (x)
2010 F 9,099.4 677.3 0.57 2.47 24.5 5.1 1.2
2009 F 8,875.1 685.3 0.57 2.15 30.7 5.1 1.4
2008 A 9,721.7 958.0 0.80 1.58 67.4 2.8 1.4
2007 A 4,272.9 535.4 0.45 0.80 64.6 10.4 5.9
