Project delays in Saudi Arabia take toll on Arabtec's profits

Arabtec Holding, the UAE's biggest construction company, suffered a sharp drop in profits for the second quarter as delays to key projects failed to boost sales.

The company's revenue fell 5 per cent to Dh1.21 billion (US$329 million) for the quarter, compared with the same period last year, and expenses soared more than 90 per cent to Dh94m, contributing to a 74 per cent drop in net profit to Dh28.9m.

The figures missed analysts' expectations and the shares dropped more than 6 per cent yesterday, compared with 3.7 per cent for the overall market.

"This year is the bottom in terms of earnings, there's going to be growth going forward as a number of projects take off," said Roy Cherry, an analyst at Shuaa Capital. "We expect the pickup to start in the fourth quarter."

Analysts estimate that half of the company's future projects have been delayed. This has affected revenues because construction companies book sales figures as a project is being built.

A 5bn Saudi riyal (Dh4.89bn) joint venture with the Saudi Binladen Group to build 5,000 houses has yet to produce any firm revenues. The project makes up about 30 per cent of Arabtec's backlog of projects.

Mr Cherry expects the Saudi project to start before the end of the year and boost the company's earnings in the second half.

Binladen announced last week it was set to build the world's tallest tower in Jeddah at a cost of 4.6bn riyals and Mr Cherry believes Arabtec could also benefit from this huge development.

"In this region, construction is bound to take off and Saudi Arabia is launching the biggest projects," he said. "Arabtec has proven it can win contracts in the country."

The kingdom has $220bn of projects in the development pipeline, representing 36 per cent of all the constructions deals in the Middle East and North Africa, according to data compiled by Citi Investment Research & Analysis. Arabtec is now being paid money owed by various companies that delayed payments during the global financial downturn, which should help to pacify some investors who had called for greater loss provisions.

Many of the companies that owe money are government-owned or backed so analysts expect the cash to be recovered eventually.

"Arabtec is in a very healthy position, net cash has been in positive territory for three consecutive quarters," said Mr Cherry.

In the first half, cash received from operating profits of Dh410m far exceeded profits of Dh56m for the first six months of the year, but receivables are still high at more than Dh4.5bn, which is close to the same level of revenues the company achieves in a year.

rjones@thenational.ae