The total revenues of Arabtec Holding PJSC (Arabtec) for the year 2006 were AED2.81bn. We expect the revenues of the company to grow at a CAGR of 18 per cent over the next four year period 2007-10 to reach AED5.4bn by 2010. As per our assumptions, construction contracting will remain the main business of the company contributing over 90 per cent of total revenues over the forecast period. We also believe that the company’s profitability will improve from its current level.
The value of Arabtec’s shares derived from the weighted average of the DCF and relative valuation methods is AED6.69 per share. The stock closed at AED5.65 on the DFM on August 6, 2007, which implies that the weighted average value of Arabtec’s shares is at a premium of 18.4 per cent to the share’s current market price. At their current price, Arabtec’s shares are trading at a P/E multiple of 12.7x the 2006 earnings, and forward multiples of 10.3x and 8.3x the projected 2007 and 2008 earnings respectively. We, therefore, recommend a 'BUY' on the Arabtec stock at its prevailing price levels with a medium-term perspective.
Financial Performance
The company’s total revenues were AED2.81bn for the year ended December 2006. On Y-o-Y basis, the revenue was up by 40.4 per cent during 2006.. Revenue from construction contracting constituted about 94.7 per cent of the total revenue for the year, down from 97.4 per cent recorded during the previous period. On Y-o-Y basis, the revenue from construction contracting was up by 36.54 per cent during 2006.
Direct costs for the year were AED2.45bn, growing by 34.8 per cent on Y-o-Y basis over the previous period. About 95.1 per cent of this amount pertained to construction contracting, with the balance emanating from the other activities. Gross profit for the year amounted to AED357.0mn, growing significantly by 97.2 per cent on Y-o-Y basis over the previous period. Gross profit margin jumped to 12.7 per cent in 2006, up from 9.0 per cent in the previous period. Gross profit margin of the construction contracting was 12.3 per cent in 2006, up from 8.8 per cent in the previous period.
Salaries and employees’ benefits stood at AED93.4mn in 2006 and constituted 3.3 per cent of revenue, up from 2.0 per cent in the previous period. General & administrative expenses amounted to AED58.0mn and constituted 2.1 per cent of revenue, up from 1.2 per cent in the previous period. Operating profit during the year was AED207.3mn, with an operating profit margin of 7.4 per cent as compared to operating profit margin of 5.6 per cent in the previous period. Net profit during the year was AED216.9mn, with a net profit margin of 7.7 per cent as compared to net profit margin of 6.5 per cent in the previous period. The company declared 15 per cent cash dividend and 15 per cent stock dividend for the year.
The total assets of the company were AED2.34bn at the end of 2006, up from AED1.89bn recorded at the end of the previous year. Out of the current assets of AED1.61bn recorded at the end of the year, trade & other receivables amounted to AED1.07bn. The receivable level has gone down to 126 days in 2006, from 160 days in the previous period. Simultaneously, inventories totaled AED215.1mn at the end of 2006 with the inventory level at 23 days, up from 19 days in the previous period.
The company had operational revenues of AED1.77bn in the first six months of 2007, up 25.1 per cent Y-o-Y. The total direct costs of AED1.50bn were up 21.2 per cent y-o-y. The lower growth in the direct costs caused a significant improvement in the gross profit, which was AED265.6mn, up 52.5 per cent y-o-y, for a gross profit margin of 15.0 per cent, against 12.3 per cent a year ago. Net operating costs of AED78.6mn were up 23.7 per cent y-o-y, leading to an operating profit margin of 10.6 per cent, against 7.8 per cent a year ago. The company’s net profit during the period of AED173.4mn was 52.7 per cent higher than that in the corresponding period of 2006.
Total assets of the company stood at AED2.88bn at the end of June 2007. The growth in the assets during 1H-2007 was mainly due to increase in current assets, notably cash and cash equivalents. While the current assets were AED2.08bn at the end of the period, trade & other receivables amounted to AED1.15bn (121 receivable-days). Simultaneously, inventories totaled AED179.5mn (24 inventory-days). Net fixed assets amounted to AED497.6mn at the end of the period.
We believe Arabtec has a healthy business model and the company is riding high on the wave of construction activities in the GCC region. In our opinion, the region will continue to see strong growth in construction activities and Arabtec, with its expertise in the segment, will continue to benefit from this.
