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Global Research

Sector Construction
June 2014

GCC Contractors

GCC Construction Contractors 1Q14

Sector profit grows 15.8%YoY to USD67mn in 1Q14


Backlog rises 23.2%YoY in 1Q14
Construction activity slows down in Saudi Arabia
Gross margin at 11.0% in 1Q14, down from 11.5% in 1Q13

Profit grew 15.8%YoY to USD67mn in 1Q14


GCC contractors (GIH Coverage) recorded a profit of USD67mn, up 15.8%YoY from
USD58mn in 1Q13. Heavyweight Arabtec continued to drive the sectors profit during the
quarter; Arabtecs profit grew 120.7%YoY to USD38mn. AKS profit rise of 78.4%YoY to
USD9mn also supported sector growth. On a QoQ basis, sector profit rose 18.8%. The
increase was mainly driven by AKS and Arabtec. Profit of AKS and Arabtec grew
285.2%QoQ and 13.0%QoQ, respectively.
Order backlog rises 23.2%YoY and 3.8%QoQ in 1Q14
Total value of projects awarded rose to USD1.7bn in 1Q14 from USD0.8bn in 1Q13,
mainly due to a surge in the order receipt of Arabtec and GECP. Arabtecs order receipt
rose to USD1.1bn in 1Q14 from USD0.2bn in 1Q13, while GECPs order receipt
increased to USD75mn in 1Q14 from USD31mn in 1Q13. Total backlog grew 23.2%YoY
and 3.8%QoQ to USD12.8bn in 1Q14.
Construction activity slows down in Saudi Arabia
While Saudi Arabia remains the regions largest construction market, contract awards for
the 1H-2014 are 66% down on the same period in 2013. The USD12.8bn worth of deals
awarded in the first half of 2013 were then swiftly followed by the USD22.5bn-worth of
contracts let on the ambitious Riyadh Metro project in the third quarter. While projects as
large as the Riyadh Metro do not come along that often, the number of contract awards
has dropped in 2014 and, while markets such as Dubai are picking up, the kingdoms
construction sector has failed to live up to expectations so far this year. The potential is
still there, with billions of dollars-worth of social infrastructure, transport and industrial
schemes in the pipeline.
Labor laws and bureacracy concerns for KSA; Dubai expo key catalyst for UAE
Implementation of the recent labor laws have not only created labor shortage but also
dented margins in the Kingdom. Moreover, Saudi contractors continued to face
bureaucratic obstacles, which slowed down project activity, adding to the contractors
woes. Nevertheless, the Dubai Expo 2020 would act as a key catalyst for the UAE as it
would bring in huge infrastructural investments into the country.
GCC Construction Contractors

Hettish Karmani
Senior Manager Research
hkumar@global.com.kw
Phone: (965) 2295-1281
Global Investment House
www.globalinv.net

Al Khodari, KSA
Arabtec, UAE
DSI, UAE
Nass Corp, Bahrain
CGC, Kuwait
Galfar, Oman

Mkt Cap
(USDmn)
618.8
3,733.6
958.1
103.9
414.5
278.8

Price
In (LC)
43.7
3.1
1.5
0.2
1.1
0.4

Stock Performance
1m
3m
12m
12.4% 25.0% 39.6%
-49.8% -22.1% 109.0%
0.7%
-9.4% 63.8%
0.6%
5.3% 19.5%
-5.2%
-4.0%
-8.6%
0.0%
0.0%
0.2%

P/E
2014e
23.45
28.11
16.56
NA
NA
NA

P/BV
2014e
2.66
2.33
1.13
NA
NA
NA

Source: Bloomb erg & Glob al Research


* Market prices as of 24 June 2014

Please see penultimate page for additional important disclosures. Global Investment House (Global) is a foreign broker-dealer
unregistered in the USA. Global research is prepared by research analysts who are not registered in the USA. Global research is
distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Cadwyn Point Partners LLC, an SEC
registered and FINRA-member broker-dealer.

Global Research - GCC

GCC Construction Sector

GCC construction industry stays around USD2.6tr


The GCC construction market is valued at 2.6tr (ongoing projects only) as per the Zawya Projects. Saudi Arabia
continues to enjoy the highest market share of 35.5%, with projects valued at USD938.1bn of the total. Next is UAE
with projects valued at USD821.6bn or 31.1% of the total, while Qatar has projects worth USD376.8bn or 14.3% of
the total construction market. Bahrain has the lowest projects valued at USD55.5bn or 2.1% of the total market.

Share of Real Estate and Infrastructure rises to 67.1%


In broad sectors, combined share of Real Estate and Infrastructure rose to 67.1% (March 2014) from 64.8%
(December 2013) of total GCC construction market. Real Estate leads the table with 40.6% market share of the total
construction market, followed by Infrastructure with 26.5%. Within Real Estate, UAE tops the chart with 44% market
share, while Saudi tops in Infrastructure with 41.3% share. With Riyadh Metro worth USD22.5bn and Doha Metro at
USD6.2bn, transportation (includes Airports, Roads, Bridges, Export/Import Terminals, Metro, Railways and other
public transportation projects) constitutes the largest segment with 23.9% of total GCC construction industry size.

Labor laws and bureaucracy continue to concern Saudi Arabia


KSA contractors continue to struggle with bureaucracy and new labor laws; the government recently cracked down
on illegal workers in the country to improve employment for locals. This has resulted in an exodus of laborers from
KSA, which has significantly affected the construction industry. This is reflected in the considerable decline in the
1Q14 gross margin of sector heavyweight AKS.

Dubai Expo a potential catalyst


We believe the UAE would benefit significantly from Dubai Expo 2020 as it would bring in investments worth
AED30bn (USD8.1bn) for new infrastructure during the next 10 years. Projects worth USD6.8bn are expected to be
completed in the run-up to the event in 2020. This would prove beneficial for local contractors by easing competition,
which has been driving margins down for some time. The 438-hectare Expo 2020 site, which is expected to be
completed at a cost of USD24bn, itself is a major project. We expect Arabtec and DSI, the two biggest contractors
in Dubai, to reap maximum benefits due to their wider expertise and strong market presence.

Order backlog rises 23.2%YoY and 3.8%QoQ in 1Q14


Order backlog surged 23.2%YoY to USD12.8bn in 1Q14, after rising 20.5%YoY in 4Q13. Total value of projects
awarded was USD1.7bn, up 101.6%YoY from USD0.8bn in 1Q13. On a QoQ basis, projects awarded increased
78.3%. Arabtec and GECP boosted the sectors total project awards. Arabtecs project awards rose to USD1.1bn in
1Q14 from USD0.3bn in 1Q13, while those of GECP increased to USD75mn in 1Q14 from USD31mn in 1Q13. UAE
contractors had the largest order backlog, led by Arabtec and DSI, which accounted for 68% and 17% of the sectors
backlog, respectively.

Gross margin contracts to 11.0% in 1Q14 from 11.5% in 1Q13


The sectors gross margin stood at 11.0% in 1Q14, down from 11.5% in 1Q13. However, on a QoQ basis, gross
margin improved from 9.3% in 4Q13. Operating margin also contracted to 4.9% in 1Q14 from 5.5% in 1Q13. This
trend supports our view that the sector would continue to witness declining margins as rising construction costs and
stiff competition eat into the profits of GCC contractors.
Gross Margins & ROE - 1Q14

8%

AKS

NASS

18%
12%
12%
6%
6%
CGC

GECP
GECP
DSI
CGC

ARTC
NASS
ARTC

Net Margin

Return on Equity

Receivable Days & Net Margins - 1Q14


10%

30%
18%
24%

NASS
AKS NASS
AKS

DSI

4%

DSI
CGC

2%

0%

8%
4%

11%
8%

ARTC

6%

CGC

5%
0%

ARTC

14%
12%

Gross Margin

17%
16%

20%

0%
100
120

140
180

GECP
GECP

180 240 220

300
260

300
360

Receivable Days

Source: Company Reports & Global Research

June - 2014

Global Research - GCC

GCC Construction Sector

Contractors Financial Performance


Business activity in the GCC construction sector continues to grow in 1Q14, evident from the 23.2%YoY growth in
order backlog, while the sectors profit surged 15.8%YoY to USD67mn in 1Q14. The growth was mainly driven by
Arabtec and AKS, which saw profits soar 120.7%YoY and 78.4%YoY, respectively.
Arabtecs growth was driven by a 39.3%YoY revenue increase due to a larger order backlog and improved project
execution, particularly in the UAE (revenue up 66.9%YoY to AED1.4bn). Consequently, gross profit surged
73.2%YoY, resulting in a 3.0 percentage point improvement in gross margin to 115.3% in 1Q14 from 12.3% in 1Q13.
Moreover, the construction segments (68.4% contribution in total revenue) share in gross profit rose sharply to 61.5%
in 1Q14 from 42.7%, which resulted in the expansion of gross margin by 4.2 percentage points to 13.8%. Moreover,
SG&A costs (as a percentage of revenues) fell to 7.4% during the quarter from 8.3% in the corresponding quarter last
year, but were up on a QoQ basis from 5.6% in 4Q13. Thus, higher gross margin coupled with lower SG&A costs
resulted in significant improvement in operating margin to 7.9% in 1Q14 from 4.0% in 1Q13. However, Arabtec posted
negative other income of AED19.1mn compared with AED37.9mn due to its share of loss (AED45.8mn) from its
associate DEPA Ltd. Consequently, Arabtecs net profit margin improved to 6.4% in 1Q14 from 4.0% in 1Q13.
Similar to Arabtec, AKSs growth was led by higher other income (increased SAR41.3mn YoY due to annual auction
of machinery during the quarter) and lower selling and marketing costs (4.6% of revenue vs. 6.4%). However, gross
margin contracted severely to 4.8% in 1Q14 from 13.3% in 1Q13 due to higher sub-contracting cost resulting from
replacement of non-performing sub-contractors. Furthermore, manpower cost rose 30.6%YoY due to execution of
more labor-intensive projects. Meanwhile, a 68.6%YoY rise in finance charges, led by higher debt and depreciation
due to use of more equipment for newly awarded projects, depressed net profit. However, net profit margin improved
to 6.9%, up from 5.3% in 1Q13, driven by higher other income.
The sectors profit growth, however, was restricted by a 28.0%YoY decline in DSI 1Q14 profit. The decline was mainly
due to higher cost of sales (up 3.3%YoY to 92.3% of revenue) driving down gross margin to 9.6% in 1Q14 from
10.6% in 1Q13. However, DSIs SG&A costs (as a percentage of revenues) declined to 5.2% in 1Q14 from 5.5% in
1Q13. Moreover, rise in other income (up 57.6%YoY) and net finance income of AED0.4mn compared with finance
cost of AED1.5mn restricted the fall in net profit. Meanwhile, an AED1.5mn loss from investment in joint ventures
depressed net profit.

GCC Construction Sector* - Quarterly Performance


(USD mn)
Sales Revenue
Cost of Sales
Gross Profit
Operating Expense
Operating Profit
Financial Charges
Net Profit

1Q13
1,279
1,132
148
78
70
13
58

4Q13
1,581
1,434
147
90
57
22
57

1Q14
1,500
1,335
165
91
74
15
67

QoQ
-5.2%
-7.0%
12.4%
1.6%
29.7%
-34.3%
18.8%

YoY
17.2%
17.9%
11.7%
17.2%
5.4%
13.1%
15.8%

Gross Margin (%)


Operating Margin (%)
Net Margin (%)

11.5%
5.5%
4.5%

9.3%
3.6%
3.6%

11.0%
4.9%
4.5%

Source: Company Report & Global Research


* Includes Arabtec, DSI, AKS, NASS Corp, GECP and CGC

On a QoQ basis, the sectors profit grew 18.8%, mainly driven by AKS and Arabtec. Profit of AKS and Arabtec grew
285.2%QoQ and 13.0%QoQ, respectively. AKSs profit increase was driven by higher other income due to annual
auction of machinery during the quarter. On the other hand, Arabtecs profit growth is mostly ascribed to lower cost of
sales resulting in gross margin improving to 15.3% from 10.8%.

June - 2014

Global Research - GCC

GCC Construction Sector

Projects and Contracts

Overall GCC projects market stands at USD2.43tn as of Mar-2014


Contract awards in Middle East up 84.0%QoQ during 1Q14
Saudi Arabia continues to be a leader in the projects market

GCC Projects Market Size


2,500

(USD bn)

2,000
1,500
1,000
500

2005

2006

2007

2008

2009

2011

Mar-13

1Q-13

2004

3Q-12

0
2010

Mar-14

1Q-14

4Q-13

3Q-13

2Q-13

4Q-12

2Q-12

1Q-12

4Q-11

3Q-11

2Q-11

1Q-11

4Q-10

3Q-10

2Q-10

1Q-10

4Q-09

3Q-09

2Q-09

1Q-09

4Q-08

3Q-08

2Q-08

80
70
60
50
40
30
20
10
1Q-08

(USD bn)

MENA Contract Awards

Projects Country Wise


1,800
Mar-13

Mar-14

(USD bn)

1,440
1,080
720
360
0
Saudi Arabia

June - 2014

UAE

Oman

Kuwait

Qatar

Global Research - GCC

GCC Construction Sector

Contracting Companies
New order receipts surge to USD1.7bn in 1Q14 from USD0.8bn in 1Q13
Backlog rises to USD12.8bn in 1Q14 from USD10.4bn in 1Q13
Arabtec continues to lead in order backlog (68%), followed by DSI (17%) and AKS (11%)
Order Receipts 1Q14

Order Receipts (Aggregate)

1.0
1.7

2.0
1.3
0.9

0.8

1.0

0.8
0.6
0.4
0.2

0.1

0.2

0.3

Arabtec

GECP

1Q14

4Q13

3Q13

2Q13

1Q13

DSI

AKS

(USD bn)

1.1

1.2

3.0

3.0

(USD bn)

Includes aggregate of Arabtec, DSI, GECP and Al-Khodari

Backlog 1Q14
8.0

Backlog (Aggregate)
14.0
12.2

12.1

12.3

(USD bn)

13.0
12.0
11.0

10.4

6.0

2.0

10.0

3.3

4.0
0.9

1.5

Arabtec

DSI

1Q14

4Q13

3Q13

2Q13

1Q13

GECP

9.0

AKS

(USD bn)

7.1

12.8

Includes aggregate of Arabtec, DSI, GECP and Al-Khodari

Backlog Market Share 1Q14

Order Receipts Market Share 1Q14


AKS
7%

AKS
11%
Arabtec
68%

Arabtec
55%

GECP
12%

GECP
4%
DSI
17%
Market size assumed to be the aggregate of the mentioned players

June 2014

DSI
26%
Market size assumed to be the aggregate of the mentioned players

Global Research - GCC

GCC Construction Sector

Financials in Chart
EV/Backlog (x) v/s Backlog/Sales (x)
1.2x
AKS

EV/Backlog
(Last Reported)

1.0x

Arabtec

0.8x
GECP

0.6x
0.4x
0.2x

DSI
4.5x

4.0x

3.5x

3.0x

2.5x

2.0x

1.5x

1.0x

0.0x

Back Log/Sales (Last Reported)


Size of the Bubble represents Market Cap

Gross Margins 1Q14

Net Margins 1Q14


10.0%

19.0%

8.0%
15.0%
6.0%
11.0%
4.0%
7.0%

2.0%

3.0%

0.0%
ARTC

DSI

AKS NASS CGC GECP

Receivables Outstanding (Days) 1Q14

ARTC

DSI

AKS NASS CGC GECP

Inventory Stock (Days) 1Q14

350
80
300
64
250
48
200

32

150

16

100

ARTC

June 2014

DSI

AKS

NASS CGC GECP

ARTC

DSI

AKS

NASS CGC GECP

Global Research - GCC

GCC Construction Sector

Operating Expense to Sales 1Q14

Debt to Equity (x) 1Q14

16.0%

200.0%

12.0%

150.0%

8.0%

100.0%

4.0%

50.0%

0.0%

0.0%
ARTC

DSI

AKS NASS CGC GECP

ROE 1Q14

ARTC DSI

AKS NASS CGC GECP

ROA 1Q14

16.0%

8.0%

12.0%

6.0%

8.0%

4.0%

4.0%

2.0%

0.0%

0.0%
ARTC

DSI

AKS NASS CGC GECP

Cash as % of Assets 1Q14

ARTC

AKS NASS CGC GECP

Cash as % of Debt 1Q14

20.0%

200.0%

15.0%

150.0%

10.0%

100.0%

5.0%

50.0%

0.0%

DSI

0.0%
ARTC

June 2014

DSI

AKS NASS CGC GECP

ARTC DSI

AKS NASS CGC GECP

Global Research - GCC

GCC Construction Sector

APPENDIX
DSI - Business Segments
Segments
Revenue Share (%)
Net Profit Share (%)

Engineering
46.4
68.5

Civil
43.6
29.7

Oil & Gas


6.2
22.3

Others
3.8
-20.6

* For 1Q14

ARABTEC - Business Segments


Segments
Revenue Share (%)
Net Profit Share (%)

Construction

MEP

68.4
103.3

8.6
3.2

Oil & Gas, Infrastructure


and Power
27.1
36.1

Others
5.6
-42.5

* For 1Q13, Total might not add up because of eliminations

Abdullah A. M. Al-Khodari Sons Company - Business Segments


Segments
Revenue Share (%)
Gross Profit Share (%)

Contracting
99.5
95.8

Trading
0.5
4.2

* For 1Q14

June 2014

Global Research - GCC

GCC Construction Sector

Order Receipts / New Awards (Latest)

Drake & Scull International


Country

Segment

Kuwait
Algeria
UAE

Engg.-MEP
Civil
Engg.-MEP

Egypt

Civil

Project Name
Sheikh Jaber Cultural Center ,Retail & Health care Facilities
Mixed-use development in Algiers
Plaza View, a mixed-use development in Abu Dhabi
OSBL construction and civil works for Utilities and offsite
facilities for Tahrir Petrochemical Corporation Project

Size (USDmn)
35
40
30
599

Abdullah A. M. Al-Khodari Sons Company


Country

Segment

KSA

Contracting

KSA

Contracting

KSA

Contracting

June 2014

Project Name
Construction of Storm Water Drainage Channels, Networks
and Clearing Wadi Sulai (Phase 2) from Ministry of Municipal
& Rural Affairs (Riyadh Municipality)
2nd phase of the construction of the Support Deanship
Building from Ministry of Higher Education (Taibah
University)
Engineering, Procurement and Construction of 33KV Switch
Stations from Royal Commission for Jubail & Yanbu

Size (USDmn)
14

9
21

Global Research - GCC

GCC Construction Sector

Factors Influencing Profitability


110

2,200

105
2,000
(USD/Ton)

(USD/bbl)

100
95

1,800

90
1,600

85
80

1,400
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

Crude Oil, WTI

Aluminum

8,500

160

8,000

7,500

(/dmtu)

(USD/Ton)

140

7,000

120

100

6,500

6,000

80
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

Iron ore

750

67.5

730

66.8

710

66.1

(USD/Ton)

(USD/Ton)

Copper

690

670

65.4

64.7

650

64.0
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14
Steel Rebar

1Q12 1H12 9M12 2012 1Q13 1H13 9M13 2013 1Q14


Cement

Source: World Bank Pink Sheets & Glob al Research

June 2014

10

Global Research - GCC

GCC Construction Sector

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June 2014

11

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