Arabtec's wait for quarterly profit ends

Arabtec on Thursday posted its first quarterly profit in two-and-a-half years as the contractor’s new management presses ahead with a high-stakes turnaround plan.

The Burj Khalifa builder said net profit for the first three months of 2017 stood at Dh18 million – its first quarterly profit since the third quarter of 2014. It reported a net loss of Dh46m for the quarter of 2016.

Arabtec said that revenue for the quarter was Dh2.2 billion, up 11 per cent compared to the Dh2bn it generated during the same period last year.

“While this is another step towards the turnaround of the group, there is still a lot more work to be done,” said Hamish Tyrwhitt, the group chief executive. “This initial step reinforces our commitment to returning Arabtec to profitability and solidifies our strategic roadmap to achieving sustainability.”

The news comes less than a month before Arabtec is due to hold its latest rights issue. The company is looking to raise Dh1.5bn by issuing 1.5 billion new shares, which will be effectively underwritten by the company’s biggest shareholder, Aabar Investments, which currently owns a 36.11 per cent stake in the firm, if other shareholders do not get on board.

The rights issue is the first step in the new management’s three-year turnaround plan in which it aims to clean up its balance sheet.

“After two-and-a-half years Arabtec has finally made a profit and the fact that the company has made a profit by the skin of its teeth and much of the income has come from minority interests doesn’t matter,” said Sanyalak Manibhandu, head of research at NBAD Securities.

“Of course there is still a lot more for the new Arabtec management to do,” he added. “It remains to be seen whether shareholders will subscribe to the new rights issue at a price which is higher than the current share price. I believe Arabtec is now a recovery story and the new management have set their sights on achievable goals.”

The company said that its gross margin also increased to 4 per cent versus 2 per cent during the same period last year.

“To optimise the delivery of our Dh17bn backlog, we are making key operational improvements through embedding enterprise risk management and a performance-driven culture, which is already evident in the increase of our gross profit margin,” Mr Tyrwhitt added. “Resolving legacy claims and collecting receivables is a key action in Phase One which will be achieved through our ability to turn risk into opportunity,”

Arabtec said that it had net liabilities of Dh248.9 million, while its current liabilities exceed its assets by Dh1.8bn. This means that the company is in breach of some of its debt covenants.

Arabtec added that it had made contingencies of Dh1.05bn to cover the possibilities that it could lose a number of lawsuits relating to its business. These include a dispute with a joint venture partner in Qatar over the country’s New Doha Airport.

The company said that it had lost control over its subsidiaries in Saudi Arabia on December 31, 2016.

Under the turnaround plan, which Arabtec unveiled in March, the company plans to stabilise the business through capital-raising in 2017 and ridding itself of accumulated losses of Dh4.6bn. Then next year, Arabtec said that it plans to prepare for the future by keeping costs in check and growing its backlog of projects to Dh8bn to Dh9bn.

The company said it plans to focus on growing profit margins and cash generation in 2019.

“Of course it is nice to see a positive bottom line at Arabtec, but we are concerned that margins are still wafer-thin. I would hope to see margins at something like 7 or 8 per cent for a company like Arabtec,” said Allen Sandeep, research director at Cairo-based Naeem Brokerage.

Arabtec’s shares closed up 1.6 per cent on Thursday at 83 fils.

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