GCC expenditure plans to remain relatively intact

Expenditure plans in the construction and infrastructure sectors will remain relatively intact in the GCC as governments are committed to mitigate the slowdown and boost their economies through strategic infrastructure developments.

This was revealed in a recent HC Brokerage report, which maintained that with more businesses going bankrupt in Europe and the US, highly skilled calibres have been eyeing the move to the GCC, where the market is still rather intact.

Besides, the population in the GCC is expected to grow by two per cent in 2009, mainly driven by growth in Qatar, Abu Dhabi and Saudi Arabia where thriving expansionary plans are under way. The report said the construction sector is considered a relatively low-risk one and cited the stable credit outlook in the GCC by Fitch Ratings in January 2009 to support the case.

Other factors such as the high levels of reserves and accumulated revenues from previous years when oil prices were at their peak and the continuing drop in construction costs within the region encourages construction and infrastructure investments, it said.

As a result, GCC countries have the "financial ability to support their spending programmes and boost their economies through non-oil dependant revenues", and are "adhering to their earlier announced economic stimulus packages, supported by their accumulated revenues and benefiting from the decline in building materials prices", said the report.


GCC WELL POSITIONED

Post the financial crisis, the MSCI World GDP index lost 35.5 per cent during the second half of 2008 and the International Monetary Fund estimated that global GDP will decline by 1.3 per cent this year in its April update, versus its previous estimate of 0.5 per cent growth in 2009. Global GDP grew by 3.4 per cent in 2008.

However, the countries of the GCC and Mena have a more optimistic outlook.

"We believe that construction activity in the GCC is sustainable as the commercial viability of infrastructure and utility projects is determined by future demand, and demand for these services in emerging markets is essentially driven by demographic trends," said the report.

In an attempt to boost their economies, the GCC governments announced various stimulus packages and decided to heavily invest in construction, specifically in the infrastructure and energy sectors.

According to Meed, project contracts awarded in Mena in June (until June 22) were worth about $9.8 billion (Dh36bn) compared to $4.5bn awarded in May, said the report. The Meed Projects Index reported a three per cent drop month-on-month in total value of planned and under way projects in the GCC, coming in at $2.145 trillion as of June 22, compared to $2.204trn as of May 30. Planned and under way projects, however, are up 8.9 per cent year-on-year from $1.98trn, added HC.


SAUDI ARABIA

The Saudi Government announced its plans to spend $400bn on infrastructure projects over the next five years as it seeks to benefit from lower construction costs. In January, the government announced that it will earmark SR11.5bn (Dh11.2bn) in 2009 and 2010 for road construction projects with total length of 8,250km, representing a 4.7 per cent increase over the current road length of 175,000km.

Although the Saudi economy is expected to contract by 0.9 per cent in 2009, it remains the largest construction sector in Mena. The government is encouraging privatisation and public-private partnerships and plans to invest $300bn in infrastructure development between 2008 and 2010, focusing on expanding and modernising key sectors such as education and healthcare.

It is expected that more than $200bn will be needed to be invested in water and power projects to meet the forecasted demand over the next 15 years. In October 2008, it was reported that more than 285 civil construction projects worth more than $260bn were presently in progress or in design phase in Saudi Arabia.


QATAR

In addition to its investments in the oil and energy sector, the Qatari Government intends to invest $130bn to develop the state's infrastructure and diversify its economy in line with its ambitious target of zero dependence on oil by 2020.

The Qatar construction industry will grow by 14.6 per cent in 2009, said the HC report. Construction activity in Qatar is at a peak with long-term, large-scale projects planned and under way, including airport, power and rail projects. Current under way and planned projects in transportation amount to approximately $28.5bn.

One of the largest projects in Qatar is Diar's Lusail Development, with a total cost of $5.5bn.

THE UAE

The UAE's GDP is estimated to contract by 0.6 per cent in 2009, mainly driven by the slowdown in Dubai. The UAE economy remains somewhat intact, supported by Abu Dhabi. Although Dubai has announced a cutback on spending to manage its debt and restructure its system, the UAE in general is expected to continue spending on infrastructure developments in other emirates, especially in Abu Dhabi.

Population growth in the UAE will come from Abu Dhabi, and accordingly the Abu Dhabi Government is committed to invest up to $168bn in capital expenditure until 2010, which will be the main driver to the growth in the UAE, said the HC report.

"Even with the expected decline in population in Dubai, we expect population in the UAE to grow driven by an increase in Abu Dhabi's population by a compound annual growth rate of four per cent (08-12f). Even with the spending, Abu Dhabi is well-positioned to register double-digit growth in 2010 and 2011 in pursuit of achieving its 2030 Vision as reported by Abu Dhabi," said the HC report.

The UAE Government plans to invest up to $272bn in infrastructure projects over the next five to seven years. The Government of Dubai has recently announced its 2009 budget, which revealed that the government will allocate about Dh17.1bn to infrastructure spending. The UAE utilities industry, which includes water services, power generation and power transmission infrastructure, is estimated to increase by 90 per cent between 2007 and 2012. More than $10bn will be spent to meet soaring power demand in the UAE, which is expected to account for 5.77 per cent of regional power generation by 2011.

New and ongoing construction projects around Abu Dhabi include: residential projects worth $21.4bn; commercial projects worth $39.4bn; industrial projects worth $7bn; and hotels and resorts worth $14.7bn.

The first quarter of 2009 confirmed Abu Dhabi's sound position, said HC. Construction contracts awarded in the UAE in the first four months of the year were valued at $10.6bn with Abu Dhabi accounting for 58 per cent of total contracts awarded, while 33 per cent were awarded in Dubai. Contracts awarded in the first quarter of 2009 were 75 per cent lower than those awarded in the first quarter of 2008, which is only natural given the slowdown.

Lower contracts are mainly due to lack of liquidity in the Emirates and the renegotiation of contracts as a result of plummeting construction costs.


Arabtec gets 'buy' rating

HC Brokerage said it "resumes coverage on Arabtec with a 'buy' recommendation" based on a DCF value of Dh4.17 per share, which implies an upside potential of 51 per cent.

Arabtec is trading at a PER (09e) of 4.68x (45 per cent discount to peers) and an EV/Ebitda (09e) of 4.49x (37.8 per cent discount).

HC added that it believes that the stock is "undervalued at current levels" and expects Arabtec Ebitda to grow at a CAGR of 5.5 per cent (09e-13f) with an FCF CAGR of 45 per cent over the same forecasted period.

Moreover, FCF growth will come from the improving working capital going forward, resulting in lower interest expense.

"We expect the company to maintain a decent net income margin at an average of 8.4 per cent, with net income growing at a CAGR of 2.5 per cent (09e-13f). We assumed no dividends in 2009 and 2010 as the company will rely on self-financing and borrowing to support expansions and payables. However, we maintain a dividend payout of 40 per cent beyond 2010," HC said.

"We view Arabtec's strategy of diversifying its backlog portfolio as positive given that the company will focus more on infrastructure works that yield higher margins compared to its previous focus on commercial projects; and the company will benefit from high infrastructure spending in its targeted markets, specifically Qatar, Saudi Arabia and Abu Dhabi."

It also said positive factors in Arabtec's favour include being the preferred contractor for big developers such as Emaar Properties, Nakheel and Dubai Properties in the UAE and partnership and joint ventures with regional players that facilitate smooth penetration into different markets.

HC expects Arabtec's backlog to double by 2013 and has based its assumptions on the company's 1Q09 backlog of Dh18.8 billion, which excludes the Dh10bn Okhta Centre project in Russia. "Nonetheless, we project that Arabtec's backlog will double from Dh20.2bn in 2009e to Dh40.4bn at the beginning of 2013f," it said.

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