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Arabtec sees net profits clipped by high costs

Decrease could have been more if not for strong board intervention to cut down on expenses

Gulf News

Dubai: Higher costs impacted the construction giant Arabtec’s net profits for 2014, which totalled Dh241.6 million, down from the solid Dh468.26 million a year ago.

The “general and administrative costs” came to a substantial Dh749.9 million, against the Dh429.3 million incurred in 2013. In a strongly worded statement issued on Saturday, the company said these expenses could have been even higher had the Board of Directors not intervened at the “right time” in June last year. (It was in mid-June that the then CEO — and key shareholder — Hasan Ismaik stepped down.) The Board, in the statement, takes note of the operational improvements made during the second-half of last year. It did so by the “carrying out of a restructuring process to curb the unnecessary expenses that do not achieve positive returns for the company”, the statement said. “Had the Board not intervened and exerted positive efforts to protect the shareholders’ equity, there would have been much greater expenses”.

Costs were brought down by suspending certain non-core operations, such as the ones in Russia. Certain key departments were merged to bring about better efficiencies.

A 5 per cent share dividend has been proposed, equivalent to 219.76 million additional shares.

The distributable dividends — attributed to the parent company — amounts to Dh214.5 million, compared to Dh377.8 million the year before, again impacted by the higher costs. (The annual general meeting has been called for April 23.) Gross profits for 2014, incidentally, were up 68 per cent to Dh918.56 million. Full-year revenues weighed in with a 46 per cent gain to Dh8.3 billion.

Arabtec’s shares closed on Thursday at Dh2.62, down 20 fils. Over a 12-month period, the stock has shed 35.31 per cent. (It was early last year that the share started experiencing volatility over the extent of shareholding held by Ismaik and Abu Dhabi headquartered Aabar Investments. Recently, Aabar was given regulatory approval to buy a further 100 million shares and thus raise the stake to 37.27 per cent from 35.6.) This year too, the focus will be on further reducing the “proportion” of the general and admin expenses, “without affecting productivity”. In 2014, the company had an order book of Dh9.6 billion.

Streamlined planning

“The executive management, worked under the direct guidance and close supervision of the Board, to elevate the company’s administrative and technical level during the second half of the past year,” said Khadem Al Qubaisi, Chairman. “We developed the operational … policies in collaboration with one of the largest international companies, to keep pace with the group’s current and future growing requirements.

“The decisions increased the productivity level through a streamlined planning, raising the strategic performance efficiency. This is evident through the revenue growth in 2014 compared with the prior year.”

According to Sameer Lakhani of Global Capital Partners, the pressure on Arabtec shares and for listed construction firms will not cease as “long as developers continue to stretch the payment terms, now becoming more common with the softness in the real estate industry. This could set off downward pressure on margins and liquidity, which in turn hampers the stock’s performance.”

The restructuring also helped the company increase its “competitiveness”, “making it capable more than ever to win new projects”.

According to Bharat Bhatia, CEO of the steel firm Conares, project-related tendering was quite strong in both the local public and private sectors during this quarter. “Most of the big contracting companies have already secured a sufficient number of projects, and it looks like they will pretty engaged until 2017.

“The current utilisation capacity of the industry is about 60- 65 per cent. With the new tendering of projects, the market will be capable to cater to requirements.”

 

How Arabtec is plotting its next phase of growth

• Gains will be made in key geographies such as Saudi Arabia and Egypt, as well as adding to its capabilities to take on more specialized projects in the oil and gas fields. But it has “suspended operations in Russia and Pakistan to reduce costs, and will keep an eye on any beneficial investment opportunities”, the company said in a statement.

• Opportunities for acquisitions will continue to be explored in areas that will best serve its expansion drive.

• It is still on track for the one million new home development in Egypt. The delay on reaching the final agreement was “to achieve the best possible results and agree on the accurate details in all aspects relating to the project”.

• As part of the restructuring, the “company focused on the administrative and technical projects’ activities on-site, which resulted in better performance and reduced the structural risks significantly”. Some of the operational departments were also merged.

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