High Risks But Potentially High Rewards For Arabtec In Egypt

Arabtec's newly awarded contract to build one million houses in Egypt is both a major opportunity and a significant risk. On the one hand, this project allows Arabtec to ramp up its presence in the Egyptian market where we anticipate strong levels of growth in construction sector over the medium-to-long term. In addition, the awarding of this major construction project could help maintain the elevated stock price Arabtec, which is the Persian Gulf's largest publicly traded company, has enjoyed over recent weeks. However, at US$40bn the contract could potentially stretch the company beyond the limits of its capacity, especially considering that Arabtec had significantly boosted its backlog over the beginning of 2014 already.

We have been following Arabtec closely over 2013 as a series of developments pointed to the company gearing up for a solid period of earnings. From the US$1.4bn contract to build a mixed-use development of 500,000 square meters in Kazakhstan ( see 'Arabtec's Momentum Continues', 20 Jun 2013), the joint venture with Korean Samsung Engineering which aims at increasing Arabtec's involvement in the hydrocarbons sector ( see 'Arabtec Enlists Samsung To Target EPCs And Good Growth' 27 Sep 2013), and more recently the announcement that the company will open five new subsidiaries in order to grow its international exposure, including to the Egyptian market. As we anticipated, these moves, particularly international diversification, have had a considerable positive impact on the company's stock price which increased by almost 80% in the first 6 weeks of 2014. Looking ahead, if the Egyptian contract is delivered successfully, Arabtec will be a completely different company in five years time.

Arabtec signed the agreement to build one million houses for low-income families with the Egyptian army. Construction on the project, which will be developed in several phases, is expected to begin in Q314 in order to reach completion by 2020. To ensure demand for such a large projects, Arabtec has entered into an agreement with forty Egyptian banks to offer financial assistance to those low-income individuals at which the houses are targeted, according to the company's CEO, Hasan Ismaik.

Sky High, But Sustainable?
Arabtec Stock Price, AED

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Related sectors of this article: Infrastructure, Construction, Residential Construction, Housing
Geography: Egypt

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