Last updated: March 6, 2013 4:03 pm

Arabtec launches aggressive finance plan

Arabtec Holdings’ shares have fallen to their lowest level in a year after the United Arab Emirates’ biggest construction company announced it would launch an aggressive capital raising and replace its founder and chief executive.

Investors are calling for more information about why the money is needed at a business that has won high-profile projects in Abu Dhabi, the UAE capital, whose government is an Arabtec shareholder and is becoming increasingly activist in using its influence.

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The shareholder concerns highlight a wider market debate about the wisdom of investing in companies alongside Gulf governments. While such projects may be politically favoured and offer the prospect of high returns, the downside is limited power in the face of dominant state interests.

The Abu Dhabi government has a “mixed track record” as a partner for minority shareholders, says Akber Khan, director of asset management at Al Rayan Investments in Doha. “However, there are certainly examples where investing alongside the government has been very lucrative.”

Arabtec’s stock fell 3.2 per cent to Dh2.1 in Dubai at the close on Tuesday, the lowest since February last year, as investors were irked by the new financing plans announced last week. The company’s share price has slumped by almost a third since it announced the proposals to raise $1.74bn by issuing shares and convertible bonds, which could dilute the interests of existing shareholders by issuing new equity.

The new funding plan includes the possible sale of $450m in convertible bonds and the issuance of 3.18bn in rights shares at Dh1.5 per share. “It’s a fairly harsh proposal and hence the reaction,” says Julian Bruce, director of institutional sales trading at EFG-Hermes in Dubai. “In these situations minority shareholders get a little scared off.”

Investors are waiting for more details on why the funds are being raised, as well as technical details such as the conversion price for the bonds, he added.

Hasan Abdullah Ismaik, Arabtec’s new chief executive, told the Financial Times the company planned to launch the share issue in late May or early June. The $450m in convertible bonds would “only be raised if needed”, at the end of this year or the first half of next, he added.

Analysts say that the size of the capital raising was above expectations and may have signalled plans for local and regional acquisitions. In November, Arabtec acquired a 24 per cent stake in Depa Limited, a Dubai-based interiors company, which some observers see as the prelude to a bid for full control.

“Investors have been caught by surprise with the amount of the capital increase and the aggressive expansion plan,” said Sebastien Henin, portfolio manager at The National Investor in Abu Dhabi.

Like other construction companies in the UAE, Arabtec’s earnings have been hit by low margins as the western financial crisis has led to some projects being cancelled or pared back. Arabtec saw a 37 per cent decline in net profit last year, reporting Dh139.2m ($37.9m) compared with Dh221.1m a year ago, although the company insists its position is healthy.

“Arabtec has good visibility on its future earnings with a strong and growing order book,” said Mr Ismaik. “It’s current backlog, including 2013 contract awards, stands at nearly Dh22bn, and this gives us clear visibility over future earnings.”

Arabtec has won high-profile contracts in Abu Dhabi since the emirate’s state-owned Aabar Investments raised its stake in the company to 21.6 per cent last year. It secured the $2.9bn mandate to build a terminal complex at Abu Dhabi airport, as well as the deal to build the emirate’s branch of the Louvre museum.

Aabar is also tightening its grip on the company, masterminding last month’s appointment as chief executive of Mr Ismaik, an Abu Dhabi-based private investor, to replace Riad Kamal, the company’s founder.

It is not the first time that shareholders in the UAE have been surprised after investing alongside government. Aldar Properties and Sorouh, two property companies part-controlled by the Abu Dhabi government, announced an unexpected consolidation last year.

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