Nakheel is inching ever closer to finalising an agreement with its trade creditors, and few companies stand to benefit more from the conclusion of those negotiations than Arabtec Construction. Yet even that large cash infusion is probably not enough to lift the contractor's shares now that its merger with Aabar Investments is off the table.
The Swiss investment bank UBS downgraded the stock from "neutral" to "sell" yesterday, issuing a 12-month price target of Dh2.10. The stock fell 2.1 per cent to Dh2.32 yesterday after the downgrade. Just more than a month ago, Arabtec called off the proposed merger with Abu Dhabi's Aabar but left the door open to working together in the future. The two companies began talks when Nakheel, a property arm of Dubai World, announced it would have difficulty delivering on its payment obligations.
The merger would have diluted shareholders but provided Arabtec with a cash injection of Dh6.4 billion. After the merger was cancelled Arabtec stock rose as investors interpreted the move as an indication that cash flow was no longer an issue for the company thanks to the Nakheel settlement, which calls for a 40 per cent cash payment on receivables and a 60 per cent payment in the form of a tradable security.
But the analyst Saud Masud, who wrote the UBS report, believes the Aabar deal was key to Arabtec having enough capital to pursue about Dh40bn in projects in Saudi Arabia, where the company is making a big push to diversify outside of the UAE. As Mr Masud sees it, the company's cash flow remains under pressure. He said Arabtec might have to increase its provisioning on receivables and that the company's revenue and project backlog were lower in the first quarter than at any point in the last 18 months.
Arabtec is stuck between a rock and hard place. It can not aggressively expand into Saudi without the necessary capital and it does not have the cash flow to fund the Saudi projects because external financing remains tight. If Saudi takes off as a key new market, the long-term prospects for Arabtec are arguably better than ever. But until then the stock seems poised to stumble. firstname.lastname@example.org