Arabtec Topples Fragile Dubai Market Fueled by Belief

Arabtec Holding Co.’s sudden fall from grace is exposing a Dubai market that hasn’t come as far as investors thought.

The Dubai builder, whose shares quadrupled in 15 months, lost value almost as quickly as the stock market legally allowed, sparking a sell-off in the emirate’s benchmark index as confidence in a property-led rally evaporates.

Both Arabtec stocks and the Dubai Financial Market General Index were soaring through June 5, when the construction company was rattled by speculation that state-owned investor Aabar Investments PJSC might be withdrawing support for the company. In the days that followed, Aabar confirmed that it reduced its stake, Arabtec Chief Executive Officer Hasan Ismaik resigned and people with knowledge of the situation said other top executives were dismissed or quit.

“Trust in the market has been shaken,” Tariq Qaqish, head of asset management at Dubai-based Al Mal Capital PSC, said by phone yesterday. “Every time the stock market goes down, you have more margin calls so there’s a domino effect.”

The losses spread quickly to the wider market, partly because its highly leveraged shareholders were prevented from selling Arabtec stock by rules that limit one-day declines to 10 percent, Qaqish said. Instead they had to offload other stocks to make their margin calls.

Emerging Markets

The U.A.E.’s exchanges including Dubai, along with Qatar’s, began trading as emerging markets this month after index provider MSCI Inc. reclassified them in June 2013. Dubai’s gauge more than doubled almost a year after the upgrade on bets the change will lure investors managing about $8 trillion in assets. Arabtec is among the nine U.A.E. equities included in the MSCI Emerging Markets Index.

Support for Arabtec crumbled so quickly because much of it is based on the company’s relationship with the government of Abu Dhabi through Aabar and the International Petroleum and Investment Co., said Abu Dhabi-based Fathi Ben Grira, group CEO of Menacorp, which has 8.3 billion dirhams ($2.26 billion) under management. After days of speculation, Aabar announced that it cut its stake to about 19 percent from about 22 percent.

“Investors believed the company doesn’t have the support of Abu Dhabi anymore,” Grira said. “All the pipeline of Arabtec, on which the valuations were driven up, was based on that support.”

‘Strong Position’

Arabtec lost more than 50 percent of its value in the days between June 5 and yesterday. Dubai’s benchmark index dropped more than 20 percent during that period. The company said in a statement today it’s in a strong financial and administrative position, and carried out a restructuring process to cut costs and improve productivity. Project needs and expansion plans are not compromised, it said.

Under Ismaik’s 15-month leadership, Arabtec announced plans to expand into areas including oil and gas, infrastructure and power and it formed a venture with Samsung Engineering Co. to provide engineering, procurement and construction services. In March, the company agreed to build 1 million homes for low-income families in Egypt with a value of about $40 billion.

The sell-offs of Arabtec and the broader index exposed the fragility of a Dubai market that was up 51 percent this year before the slide began and appeared to be shaking off a 2008 collapse that brought the sheikhdom to the brink of bankruptcy and prompted a $20 billion bailout from neighboring Abu Dhabi.

Stock-Market Investigation?

Members of the U.A.E.’s Federal National Council, an advisory authority that represents the interests of the Emirati population, are seeking an investigation into declines in the stock markets, Alkhaleej newspaper reported today.

Arabtec’s streak helped attract retail investors into Dubai stocks, driving prices higher than justified by economics and company earnings, said Simon Kitchen, a strategist at Cairo-based investment bank EFG-Hermes Holding SAE.

“Arabtec led the surge in Dubai stocks since the start of the year and retail investors borrowed a lot of money to get in,” he said. “The Dubai market corrected because other stocks were becoming too expensive. Now the stock market is becoming better aligned with the growth prospects we will see in Dubai and the U.A.E. in the next few years.”

The construction company’s fall from grace also shows a market that’s still hampered by a lack of transparency and questions of governance, according to analysts and investors. The company has yet to comment on Bloomberg News’s report that executives including the chief operating officer, chief information officer and chief risk officer have been dismissed or quit.

‘No Explanation’

“Hasan Ismaik left without any explanation and the statement issued by Arabtec seemed like a copy-paste from a standard termination letter,” Ben Grira of Menacorp said. “The reluctance of IPIC and Aabar to make a statement and explain the situation added to the concern. What about the international expansion plan and the strategy?”

To be sure, the surge in Dubai stocks is rooted in the emirate’s soaring property values and the fastest economic growth since 2007, helped by a boom in retail and tourism. Dubai’s economy may expand 5.1 percent this year, according to the International Monetary Fund. Arabtec’s shares climbed 5.1 percent today, the most in almost two weeks, to 3.28 dirhams.

Arabtec was founded in 1975 and became a publicly listed company in Dubai in 2005. Riad Kamal, the company’s founder and CEO, was replaced by Ismaik in February 2013 after Aabar bought a 22 percent stake in the company.

Burj Khalifa

Arabtec, which was one of the builders of the Burj Khalifa in Dubai, the world’s tallest tower, won projects in Abu Dhabi including construction of a branch of the Louvre museum and the Midfield terminal at Abu Dhabi airport. The company has more than 40,000 employees, according to its website.

For Kitchen at EFG-Hermes, Arabtec’s slide showed that investors were too trusting in an enterprise with state backing.

“People took what the management said at face value,” he said. “When the $40 billion of homes in Egypt was announced, they didn’t ask how it would be financed. They thought the company could do this because they felt it had the backing and support of Abu Dhabi.”

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