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Should oil-hit GCC firms look to attack or defend?

The current market slowdown has forced some GCC construction outfits onto the back foot, while others have adopted a more offensive approach.

Strategic thinking: While some GCC construction firms have taken steps to guard against market volatility, others have come out on the offensive.
Strategic thinking: While some GCC construction firms have taken steps to guard against market volatility, others have come out on the offensive.

Last week, UAE-headquartered construction giant Arabtec announced its expectation to break even in 2016, and to turn a profit next year. If successful, this would represent a significant turnaround for the contractor, which reported a net loss of $626m (AED2.3bn) in 2015.

To steady the ship, however, Arabtec is likely to reduce the size of its workforce. Speaking at the firm’s annual shareholder meeting, chairman HE Mohamed Thani Al Rumaithi explained: “2015 was a severe year; 2016 is still tough. I am confident of 2017, that’s when I see [profit].”

When asked by Reuters whether he expected to record another loss during the current year, Al Rumaithi responded: “For 2016, maybe we will break even.”

The Arabtec chairman told attendees that the company would look to reduce costs in 2016, and that this strategy may include job cuts. Although Al Rumaithi declined to specify how many positions were at risk as part of the efficiency drive, he commented: “There’s some fat to be taken out.”

But job cuts are not the only method via which Arabtec intends to streamline its operations. The firm will also consolidate by focusing on its traditional strengths. The contractor’s most recent financial statement, for instance, listed more than 50 subsidiaries; a figure that could fall significantly in line with Arabtec’s strategy for the future.

“We are a construction company,” emphasised Al Rumaithi. “We will concentrate on our core business [of] construction. If it’s not related, we’re out; if it’s related, we’re still in.”

The revised strategy comes off the back of a tough couple of years for Arabtec. The company’s share price has dropped by more than 70% compared to its May 2014 peak, owing to a series of widely reported setbacks.

The challenges being faced by Arabtec are perhaps more pronounced than those of most other outfits within the GCC’s construction community. However, they are by no means exceptional.

In neighbouring Saudi Arabia, for example, Saudi BinLadin Group (SBG) and Saudi Oger – two of the Kingdom’s largest contractors – have struggled to pay their workforces amid an increasingly cash-strapped market.

In February 2016, SBG reached an agreement to resolve salary delays faced by a number of employees. Up to 2,000 of the contractor’s engineers, management staff, and workers were reported to have been left unpaid for four months. The matter was resolved after a meeting between members of SBG’s management and representatives from Saudi Arabia’s Ministry of Labour and Makkah Police. In March 2016, following similar reports of salary delays, Saudi Oger was also reported to have adopted a recovery plan to enable the resumption of payments.

Even outfits within segments that are faring better than that of contracting have been taking steps to guard against market fluctuations. Consider UAE-based developer Emaar. To outside observers, the firm has been enjoying somewhat of a purple patch of late. In 2015, it recorded a net profit of $1.11bn (AED4.082bn), an 11% increase compared to the $998.4m (AED3.667bn) achieved during the previous year.

Shareholders approved a dividend of 15% of the share capital, equivalent to $292m (AED1.06bn), at the developer’s annual general meeting (AGM), which took place earlier this month. A forecast from analyst SICO Bahrain, meanwhile, predicted that the company would make a net profit of $305m (AED1.12bn) for Q1 2016. If accurate, this would equate to a 19.1% year-on-year increase.

Financials such as these would no doubt be the envy of most construction companies operating in the region at present. However, Mohamed Alabbar, chairman of Emaar Properties, admitted he was “really scared” of market conditions coming into the year. Despite the company’s strong performance, he and his colleagues embarked on a streamlining strategy to ensure financial security.

Speaking on the sidelines of the developer’s AGM, Alabbar explained that market conditions had posed a significant concern for Emaar.

“We were really scared of 2016,” he revealed. “Preparing for our cost budget, we basically went back to a cost-budget base of two years ago, just to be cautious.

“Did we cut costs? Yes, of course; a severe cost cut,” Alabbar conceded.

Qatar-headquartered supplier Nehmeh Group has also been motivated to improve efficiency, but Emil Nehme, chief executive officer of the company, said that these efforts have not translated into job cuts.

“We have been hearing about the current economic situation in Qatar and the region since the end of the last quarter of 2015, and we were ready for it with efficient crisis plans,” he explained.

“Being in [Qatar] for over 60 years, we always stand persistent in the market with ‘lessons learned’. Typical tactics, such as cutting costs and decreasing investments – including employment cutbacks and putting expansion plans on hold – are not on Nehmeh’s agenda. We [decided] to keep our employment untouched,” Nehme added.

To maintain one’s current number of employees may seem bold in itself in the current market, but Nehme is actually going one step further. Nehmeh Group’s CEO is using the slowdown as an opportunity to promote long-term growth – but always with an eye on efficiency.

“[Nehmeh Group is] expanding its operations to the UAE, and adding more investments in many divisions within the group, as we believe efficiency is key to our stability and [will] help us ride this critical economic situation,” he noted. “Qatar is facing some tough challenges but Qatar will get through them and get out even stronger.”

Also on the front foot is UAE-based Beaver Gulf. The company is currently working on a selection of large-scale developments, including Citymax Ras Al Khaimah (RAK) in the UAE. Interestingly, while many regional contractors have taken measures to downsize their operations, Beaver Gulf has adopted the opposite approach.

The contractor’s fleet consists of approximately 200 units of construction machinery, all of which it owns. Rajesh Kumar Krishna, chief executive officer and chairman of the company, explained: “Our strategy has been to own as many assets as possible, because that will reflect in the company’s [balance sheet].

“An asset adds value to your company. Rent, once paid, never comes back to you, but when you invest in machinery, it offers you paybacks in the long term,” he added, emphasising the high residual value of well-maintained construction equipment.

Naturally, when talking about an industry as diverse as construction, there is no right or wrong approach to current economic challenges, providing the approach encourages efficiency. Whether defensive or offensive, the key appears to be diligence.

As Beaver Gulf’s Krishna told Construction Week: “Contracting companies fail, not because of technical reasons but due to financial indiscipline.”

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