Diversification plans have been slow to pay off for Arabtec, the UAE's largest construction company, which yesterday reported an 80 per cent drop in net profit for the first quarter.
The company's revenue fell to Dh1.2 billion (US$326.7 million) for the quarter, compared with Dh1.5bn in the same period last year. Net profit was Dh26.6m, down from Dh134m last year.
Earnings fell from 11 fils a share to 2 fils a share.
"The numbers were a lot weaker than expectations," said Majed Azzam, an analyst with Alembic HC Securities. Analysts forecast earnings from Dh58m to Dh70m from the construction bellwether, which has been expanding into Saudi Arabia, Egypt and Qatar in the wake of the downturn in Dubai.
"The main reason is lots of projects finished at the end of the [last] quarter and not many have started," said Ziad Makhzoumi, Arabtec's chief financial officer, in a conference call with analysts.
But to date the expansion plans are not producing the type of profits the company had predicted, according to its filing. Net margins fell from 11 per cent in the first quarter of last year to 4 per cent this year.
"We're seeing a lot of competition squeezing margins for all contractors," Mr Azzam said. "But the pace of compression was a little bit surprising."
Several of the company's new projects have yet to launch. In October, the company announced a 5bn Saudi riyal (Dh4.8bn) joint venture in Saudi Arabia with that country's Binladen Group to build 5,000 houses. Preliminary construction has started on the project, which accounts for about 30 per cent of the company's backlog of projects, but the company doesn't expect to see any significant revenue from it until later this year, Mr Makhzoumi said.
Most of Arabtec's entries into new markets are through joint ventures, which have not aided its bottom line as much as hoped, analysts said. The company said Dh27m of its gross profit in the quarter went to "non-controlling interests".
"This reflects the new reality that minority-held businesses have been increasingly profitable as opposed to the existing business," Chet Riley, a Nomura Securities analyst, said in a note to investors.
There was some good news in the report, Mr Riley said. The company's cash position increased by Dh45m during the period, to Dh633m, and there was an increase in the backlog.
"At first glance it is disappointing, but there are some positives coming out of the results," said Mr Riley.
The company postponed in March plans for a rights issue and a $150m, five-year convertible bond, saying market conditions were not favourable. The company's stock jumped 55 per cent in the following weeks as investors took the move as a sign it was on stable ground and did not need the influx of cash. Analysts, however, expect the company to try to raise money again within the next year. "The company needs to raise capital to take advantage of what is going on in the region," Mr Azzam said.
After falling more than 3 per cent in early trading, the company's share closed yesterday at Dh1.42, up 1 fil. "I think at this level the stock is fairly valued ," Mr Azzam said. "The market is already factoring in the worst-case scenario."
The company also reported it was in arbitration over a three-year-old dispute to build the Nad Al Shebaracecourse in Dubai. Arabtec and its joint-venture partner are seeking payment of Dh2.8bn.