A prominent local analyst has warned that Dubai construction giant Arabtec is reliant upon its proposed $1.7bn merger with Abu Dhabi’s Aabar Investments to offset millions of dollars in unpaid bills.
“I think the Arabtec story is linked to the Aabar deal in the near term; I don’t see Arabtec being able to mitigate receivables exposure to Dubai without external support,” UBS head of research and senior real estate analyst Saud Masud told Arabian Business on Tuesday.
Earlier this month, Arabtec CFO Ziad Makhzoumi said that the company was owed $680m in late payments.
“On the flip side, should Saudi traction materialise over the coming years, in line with our expectations, the business model should at least stabilise,” continued Masud at UBS.
“Right now, it’s more about damage control entailing Dubai receivables and it may come at the cost of significant shareholders’ dilution – i.e. Aabar’s potential 70% stake in Arabtec,” he added.
When contacted by Arabian Business, Arabtec CEO Riad Kamal declined to comment.
Earlier this month Arabtec posted its first ever quarterly loss after a charge of about $80m for bad debts.
Deutsche Bank this week downgraded Arabtec from “buy” to “hold” due to its weak backlog, but some analysts argue the fragile backlog was expected, and that the move may have been premature.
“Management [from Arabtec] had informed us that due to weak market conditions, backlog growth could be weak in 2009 and hence, we are not completely surprised,” Al Mal Capital analyst Mala Pancholia told Arabian Business.
“We believe that Aabar needs to generate around $19bn of backlog in order to minimise the dilution impact and investors will then look at the deal favourably.”
Al Mal Capital has been conservative in its estimates for Arabtec, and the weaker backlog has been factored into its 2009/2010 model.
Pancholia said that there were four factors that would lead her to review her current position on Arabtec stock. These included Aabar’s potential to enhance the backlog – especially in Abu Dhabi, and how Arabtec plans to use the cash it will gain from the merger, which should be completed in April.
“Other catalysts are the contractor’s strategy to deal with the overhang of receivables from Dubai and a healthier backlog in Saudi Arabia & Qatar,” she added.
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