Arabtec fair value raised to Dh18.87

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Morgan Stanley has issued a target price for Arabtec of Dh18.87, which represents an upside of 57 per cent on Thursday’s close.


This bullish outlook is based on the construction giant’s Dh17 billion order backlog and its recent acquisition of a controlling stake in Abu Dhabi’s rival Target, giving it further access to the UAE capital’s booming real estate market.

Based on 2008 estimates, Arabtec is trading at a price to earnings ratio close to eight, while it earnings per share are expected to increase from 0.9 in 2007 to 1.95 in 2012.

The company’s revenues will almost treble between 2007 and 2012, from Dh4.3bn to Dh12.1bn, while gross profit margins will remain above 15 per cent, despite soaring labour and materials costs.

Arabtec’s backlog increased by Dh2.1bn this year.

“We believe that Arabtec’s growth story is becoming even more attractive, with management positively surprising the market with stronger-than-expected financial results and major additions to the order book,” the Morgan report said.

“We are upgrading our forecasts to reflect the new acquisition, a stronger-than-expected 2007 and higher backlog estimates.”

Arabtec’s stock has rocketed over the past year, increasing by 166 per cent from Dh4.50 to Dh12, although it has subsequently fallen away from a record high of Dh12.30 on March 4.

Arabtec’s business is currently heavily focused on Dubai, which provided around 80 per cent of revenues in 2007, but an aggressive overseas expansion policy combined with an increasing presence in Abu Dhabi are likely to lead to this figure falling to 50 per cent by 2012.

Morgan reports that 55 per cent of the company’s contracts secured this year are for developments outside Dubai, with 16 per cent located abroad.

“Construction activity in the Gulf does not seem to be losing its glory, with total work growing bigger every day. Projects‚ value in the GCC reached $1.76 trillion (Dh6.45trn) in March 2008,” the report says.

The UAE accounts for $771bn of this total. Saudi Arabia is second in the GCC with $454bn.

UAE construction costs increased by almost a third in 2007, leading the government to suspend cement and steel import tariffs, but Morgan does not believe this will have any real impact because demand is so voracious that prices are difficult to stabilise, even in the short term.

Arabtec labourers went on strike late last year, prompting the company to agree a 20 per cent wage rise, while accommodation costs in Jebel Ali have increased by half over the past year. However, the salary raise only increased Arabtec’s costs by five per cent, Morgan claims.

Rising construction costs will only squeeze margins on old projects with fixed price agreements, while higher costs will be priced into new building contracts.

Arabtec will continue to bid for new projects, despite its increasing backlog, Morgan said, with a number of key projects up for grabs.
 
These include construction of Bawadi in Dubai, new contracts in the Burj Dubai development and the mega projects of Abu Dhabi.

Morgan describes Arabtec’s aim to double its labour workforce over the next 12 months as tough.

UAE construction companies suffered as a result of the country’s amnesty for illegal workers, which saw more than 300,000 labourers to return home.

“The grace period hurt the industry, as even companies that did not employ illegal workers often relied on subcontractors that did,” Morgan said in its report.

“The result is that the shortfall of competent workers is met by labourers with limited experience, which in turn has a significant impact on productivity and quality.”

This trend will continue for at least two years, Morgan said, adding that quality is becoming an increasing concern as some of the construction companies cut corners to meet developers’ delivery times.
 
 
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