The Arabtec Question

Dubai-based construction firm Arabtec came under intense scrutiny over the last few months as the company’s stock went on a wild roller-coaster ride, losing a whopping 70 per cent of its value between mid-May and early July.

The Dubai-listed firm, recently included in MSCI’s emerging markets index, also caused wider trouble across the emirate’s stock market, with the Dubai Financial Market (DFM) losing about $30 billion of value in eight weeks.

While both Arabtec and the wider DFM have recovered since, the episode sparked panic amongst investors and highlighted the lack of transparency and disclosure among local companies.

WHAT WENT WRONG?

Arabtec, partly acquired by Abu Dhabi wealth fund Aabar in 2012, had a spectacular start to the year, winning a slew of projects including a $6.1 billion deal to develop 37 towers in the UAE and a $40 billion contract to construct one million houses in Egypt.

Strong support from Aabar and bullish predictions helped buoy Arabtec’s shares and they reached a multi-year high of Dhs7.4 on May 14. However, rumours soon began spreading about internal rife and a possibility that the company may delist.

“When rumours about an internal conflict between Aabar and Arabtec’s then CEO Hassan Ismaik appeared, investors were scared that the company will lose the support of Abu Dhabi, which would jeopardise the multi-billion projects announced by Arabtec,” explained Fathi Ben Grira, CEO of financial services group MENACORP.

In early June, bourse data revealed that Aabar had cut its stake in Arabtec to 18.94 per cent from 21.57 per cent, immediately causing the construction firm’s shares to plummet.

“Arabtec is a great company, a real regional champion that can pretend to fight against larger competitors on the international stage. However, investors are convinced that Arabtec’s ambitions are not realistic without the full support of Abu Dhabi government owned Aabar,” said Grira.

The news of Ismaik’s resignation and the fact that he had increased his shares in the company to become its biggest single shareholder led to more unease amongst investors and Arabtec’s stock took a big hit.

The situation primarily snowballed into a crisis because of poor disclosure from the company, stated Grira.

“Arabtec should have addressed the situation immediately. Even now the situation is not entirely satisfactory as a lot of uncertainty surrounds the stake owned by Hassan Ismaik. Despite his resignation, the ex-CEO remains the largest shareholder, at least facially, of the company.”

WIDER IMPACT

Predictably, the Arabtec saga also had a major impact on the emirate’s bourse. The DFM general index fell 22.5 per cent to 3942.8 points by the end of June, compared to 5087.5 points by the end of May, and market capitalisation also decreased by 19.8 per cent to reach Dhs292.7 billion at the end of June.

While Arabtec was primarily the cause for the drop, other factors amplified the situation, explained Grira.

“For example, a large number of investors in Arabtec were using leverage: with the stock price collapsing margin calls were exercised, not only on Arabtec but also on other stocks. With Arabtec being limit-down during several trading sessions, it was not easy to sell. Consequently other stocks were used in the margin call process, which added to the overall selling pressure and resulted in the collapse of the index.”

While the incident would have certainly concerned foreign investors, it will not spook them away, he opined. “Foreign investors are generally sophisticated and they know that this is the kind of bad surprise they can have when they invest outside developed markets.

“I am more concerned about HNWI and retail investors who started to trust the market again and who lost an important amount of money within a very short period of time. These investors might be more difficult to convince that it was only an isolated event.”

WHAT NEXT?

In early July, Arabtec finally held a press conference where chairman Khadem Al Qubaisi confirmed that Aabar would continue its backing and that the company would be going ahead with its projects. He also emphasised that Arabtec would be much-better streamlined in the future and focus on its core construction business.

“I can assure you that the transparency will improve a lot in Arabtec in the next few months. For me transparency is very important and we need to be transparent with shareholders,” he said.

Following his remarks, confidence slowly crept back into the market, with Arabtec’s share price finally stopping its freefall.

“Arabtec’s explanations on Aabar’s support were crucial to bring back some confidence among investors and the share price benefited from it immediately. But more needs to be done, notably with respect to the future plans of the company and the stake of Ismaik,” said Grira.

The entire saga has highlighted the need for greater transparency among locally listed companies, specifically in light of the recent MSCI upgrade.

“The Securities and Commodities Authority (SCA), by setting up a committee that will monitor statements issued by analysts and CEOs of listed companies, is already taking the right action. Listed companies and their managers should be held accountable for their declarations and, sometimes, for their silence,” said Grira.

He added: “A lot has been accomplished during the past years in the UAE. But there’s definitely a lot of work to be done.”