DUBAI (Reuters) - Dubai construction firm Arabtec clinched a $6.1 billion contract on Sunday, its biggest ever by value, as its relationship with Abu Dhabi state fund Aabar, a key shareholder, promised to make the firm one of the region’s top builders.
Arabtec ARTC.DU said it had signed a memorandum of understanding to build 37 mixed-use, residential and hotel towers for Aabar in Abu Dhabi and Dubai.
The announcement pushed up stock markets, especially cement shares, in Abu Dhabi and Dubai because it was a fresh sign that their real estate markets are recovering strongly after prices halved during the global financial crisis.
The news also suggested that after a few years of caution following the crisis, Abu Dhabi’s state funds, backed by the emirate’s oil wealth, are again ready to spend actively to develop the economy.
The fortunes of Arabtec, already a major player in the region with a workforce of about 63,000 people, may be transformed by its relationship with Aabar INPTVA.UL, which is Arabtec’s largest shareholder with a 22 percent stake.
Early last year, in a move supported by the Abu Dhabi fund, Arabtec replaced its founder and chief executive Riad Kamal with Abu Dhabi-based private investor Hasan Abdullah Ismaik and embarked on an ambitious growth strategy.
The new $6.1 billion contract dwarfs Arabtec’s 2012 revenues of $1.5 billion. In addition, Aabar INPTVA.UL said on Sunday that it would assign all future construction work in its $20 billion real estate portfolio around the world to the Dubai firm.
That portfolio includes projects in the United Arab Emirates, the United States, Morocco, Jordan, Serbia and other countries. Coping with this expansion of its business may pose a challenge to the company.
“This is uncharted territory for Arabtec, to do such giant projects across the region with a backlog in excess of 60 billion dirhams ($16.3 billion),” said Nishit Lakhotia, head of research at Securities & Investment Co (SICO) in Bahrain.
“Obviously, in countries where Arabtec does not have a presence yet, it can be a bit more risky to execute projects. That cannot be ruled out.”
But he added, “They have been preparing for this. The recent strategic partnerships, acquisitions, rights issue and management changes are all part of this preparation.”
Shares in Arabtec closed 2.8 percent higher on the Dubai bourse, though they came well off their highs, having risen 8.2 percent at one stage. The stock has climbed more than 50 percent so far this year after a 54 percent gain in 2013.
Arabtec said it would start work this year on the new buildings for Aabar and that all the projects would be completed by 2020, when Dubai is due to host the World Expo.
It did not say what profit margins it expected. “Margins in the UAE are still very competitive and it’s likely that margins are tight on such a major project,” said Lakhotia.
Arabtec has won a series of contracts in Abu Dhabi, including high-profile projects such as development of Abu Dhabi’s main airport and the Louvre museum there, since Aabar began building a major stake in the firm in 2012.
The firm also secured a $1.55 billion contract to build a resort in the Aqaba area of southern Jordan last month.
The UAE’s real estate market has been recovering since 2012, partly because of a tourism and trade boom in Dubai, which has attracted foreign money.
“Our growing backlog has now become a major benchmark of the speedy recovery of the sector. We expect to see good results with efforts to diversify into higher-margin sectors in association with international partners,” Arabtec’s Ismaik said in a statement.
Writing by Praveen Menon; Editing by Andrew Torchia