Arabtec to rein in lavish salaries to cut costs
Construction company has backing of key government shareholder
ABU DHABI: The construction company at the center of Dubai’s stock market meltdown sought to calm investors on Wednesday by saying it still had the backing of a key government shareholder and would rein in lavish salaries to reduce costs.
Khadem Abdulla Al-Qubaisi, chairman of Arabtec, was holding the company’s first news conference since management turmoil last month shook investors’ faith in one of Dubai’s most prominent corporations.
The Arabtec saga exposed the dangers of investing in Gulf stock markets, which benefit from strong economic growth but can fall prey to wild speculation by local retail investors, weak corporate disclosure and a hands-off approach by regulators.
In early June, Abu Dhabi state fund Aabar Investments cut its stake in Arabtec to 18.94 percent from 21.57 percent, raising doubts over its willingness to support the company. Then on June 18, chief executive Hasan Ismaik, who had built a 28.85 percent stake in Arabtec, abruptly resigned.
Arabtec shares plunged 70 percent from a record peak in mid-May to their intra-day low on Tuesday, erasing about $6.5 billion of value, as the company’s silence on issues such as its relationship to Aabar fueled panic selling by leveraged retail investors. This spread through Dubai’s market, causing the main stock index to tumble 31 percent from peak to trough.
Al-Qubaisi insisted on Wednesday that his company had not been damaged.
He said Aabar, which has declined to comment on its intentions toward Arabtec, still considered it a long-term investment and might even raise its stake in future.
“There will be no cancelation of any projects and operations are strong. The relations between Arabtec and Aabar are stronger than before,” Al-Qubaisi said.
In particular, a $40 billion, state-backed deal for Arabtec to build one million homes in Egypt over coming years will go ahead; it has almost reached the design phase, he said.
Arabtec has emerged as a tool of the UAE government’s economic diplomacy through the deal.
There were signs on Wednesday that Al-Qubaisi would moderate the breakneck pace of growth which Arabtec managed during Ismaik’s 16-month tenure.
Ismaik had the firm diversify in new sectors such as oil and gas work, real estate development, and mergers and acquisitions, and into new geographical areas such as Serbia.
Al-Qubaisi said Arabtec would now focus on its core construction business, which had current projects inside and outside the UAE worth about 26.2 billion dirhams ($7.1 billion).
He also said “a few people” had been let go as part of a cost-cutting drive since Ismaik left; he declined to give numbers. Earlier this year, Arabtec said its workforce totaled about 63,000.
“We are reviewing a lot of things. Yes, there were some people who were overpaid. We are trying to introduce the right policies for payment,” Al-Qubaisi said.
Mohamed Al Fahim, a board member from Abu Dhabi’s state-owned International Petroleum Investment Co. (IPIC), the parent of Aabar, was appointed acting CEO of Arabtec after Ismaik’s departure. Qubaisi said on Wednesday there was no deadline for announcing a new permanent CEO.
There were early indications this week that Arabtec’s public relations offensive might win over investors. In the two trading sessions before Al-Qubaisi’s news conference, its shares rebounded 27 percent, leading a partial recovery in the stock market.
However, the key question of the fate of Ismaik’s 28.85 percent stake has not been resolved; Al-Qubaisi said on Wednesday that he could not comment on it. Ismaik told Reuters in late June that he had three offers for the stake but was holding out for more than double its current market value.
While Arabtec and Ismaik said he left the firm amicably to pursue his own business interests, the abruptness of his departure suggested management frictions, and a number of senior executives linked to him have been let go since last month, company sources told Reuters.
“It is comforting to see that Aabar is committed to the company and Arabtec is now coming clear on their strategy,” said Nishit Lakhotia, head of research at Securities and Investment Co. in Bahrain.
“However, there will always be concern about what will happen to Hasan Ismaik’s stake, which needs to be sorted out at the earliest.”
It is also not clear whether Arabtec, or UAE financial regulators, will improve standards of information disclosure enough to ensure that future stock market panics can be avoided.
Qubaisi said on Wednesday that Arabtec was not responsible for the market’s plunge in June, attributing it instead to political changes in the Middle East.
The Securities and Commodities Authority, which was criticized by some fund managers for not pressing Arabtec to answer investors’ questions much sooner, issued a statement on Wednesday saying it had acted correctly.
It said it could not have suspended trading in plunging Arabtec shares pending clarification of the company’s situation, because that action could only be taken under circumstances specified by rules.
ìThis does not apply to any case of the companies listed currently on the market as they all play according to laid down rules of listing, disclosure and trading,” the SCA said.