All eyes on UAE given Arabtec fiasco

Arabtec Chairman Khadem al-Qubaisi described rumors of the company delisting as not true

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There was an ugly start to Gulf equity markets this week, with eye-watering moves lower across the United Arab Emirates. Speculation over whether Arabtec may delist, coupled with margin calls being made on retail accounts, led investors to aggressively sell down right across the board in the UAE.

Despite the recent correction, which was overdone, institutional investors were net buyers. For those who missed the rally from the start of the year, today’s prices across many names in the UAE look attractive. The country seems to have found some support at these levels.

On Wednesday, Arabtec Chairman Khadem al-Qubaisi made a long-awaited announcement through the Dubai Financial Market. He said the company would continue its work professionally as a joint stock company listed on the DFM. He also confirmed that rumors of Arabtec’s intention to delist were not true.

The company will continue to drive growth and development, and will spare no effort to achieve the highest returns for shareholders and investors. Qubaisi said the limited restructuring process carried out internally did not affect Arabtec’s ability to execute on current and future projects.

The statement ruling out a delisting is positive, and should come as a respite to investor concerns, especially given rumors of Aabar using the recent 50% drop in the share price as an opportunity to buy out the market free-float and delist the company. However, the market awaits more clarity on Aabar’s investment strategy on Arabtec going forward.

This is because retaining Aabar as its strategic shareholder is paramount for Arabtec’s growth prospects being realized. Aabar has not yet made a statement on its plans for its shareholding in Arabtec after having marginally reduced its stake in the company to 18.94% from 21.57%. The answer to this could determine the fate of AED170bn worth of MOUs signed in Egypt and the UAE.

A large portion of Arabtec’s premium valuation (P/E 2014 of 22.8x) has already priced in this expected growth through Aabar’s and Abu Dhabi’s influence. Projects signed in Egypt (AED148bn housing project), the UAE (AED21.4bn towers project) and Jordan (AED5.7bn) account for the bulk of what is priced into the stock (despite the recent c.50% correction in the share price). The tendering process for the MOUs in Egypt and the UAE is yet to commence.

Aabar’s recent moves suggest its tightened control over Arabtec. Former CEO Hasan Ismaik has been replaced by Mohamed Ali al-Fahim of IPIC (the owner of Aabar) as interim CEO. Aabar / IPIC now control 66% of Arabtec’s board membership (previously 50%), despite the much lower official stake ownership (18.94%). Six out of nine board members in Arabtec are now Aabar / IPIC executives.

The internal restructuring / staff cuts are more to do with the change in management than cost-cutting. Conventionally, ownership / top-management changes are followed by changes in key executive roles (with replacements coming in from the new guard).

Interestingly, we are yet to know what transpires regarding Ismaik’s 28.85% stake (still the largest single shareholder) in the company. Latest reports suggest he has three offers for his stake (from government entities and an international construction firm), but is holding out for more than double its current value (AED6-AED7/share).

Stocks that look attractive in the UAE are Arabtec (given confirmation that a de-listing will not occur), Drake & Skull, Dana Gas and Emaar Properties. Since March 2014, Drake & Skull has added AED2.84bn worth of new contract awards, which far exceeds its quarterly-revenue run rate of AED1.2bn-AED1.3bn. Total awards YTD2014 amount to AED4bn.

The 2Q14 earnings should not bring in any delights, with tendering activity still slow in the UAE and Saudi Arabia. There are no significant changes on the execution side either. Beyond 1H14, however, expect QoQ margins to improve because of a changing order-book mix (49% of contracts being from the UAE), and with new contracts budgeting for cost inflation in Saudi Arabia.

Regarding Dana Gas, expect a fresh payment to come from Egypt soon. Positive developments from NIOC Iran would be a major boost (hopefully before the International Court of Arbitration ruling at the end of July), and will re-price Dana to a different level. There are no major changes in terms of results in 1H14 though, and expect liquidity to drop / receivables to rise.

On Emaar, the upcoming catalyst for the stock will be mainly new project launches and executions in Dubai and international markets. The Retail IPO will also likely boost sentiment, but may drive away some current shareholders who prefer ‘pure recurring income’ exposure of the retail entity, rather than ‘development + recurring income’ exposure of the parent entity.

Nevertheless, the recent decline in share price is a good buying opportunity, as fundamentally the Emaar story remains intact.

In addition, with increasing political stability in India and Egypt (key markets for its international portfolio) following elections, expect increasing contributions from these markets going forward. Expect another strong quarter in real estate, but a bit of mildness on the retail and hospitality front on a QoQ basis on seasonality.

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