GCC Construction Sector in Q1 of 2013

A new report overviewing the developments in GCC construction sector during the first quarter of 2013 was released by Kuwait’s Global Investment House. Here are the key findings:

· Contractors record profit of USD61mn, down 2.5%YoY and up 18.4%QoQ
· Backlog rises 2.0%QoQ in 1Q13
· Order receipts/new awards plummet 55.9%QoQ in 1Q13
· Gross margins improve to 11.4% in 1Q13 from 9.2% in 4Q12

Contractors record profit of USD61mn, down 2.5%YoY and up 18.4%QoQ

GCC contractors recorded profit of USD61mn, down 2.5%YoY and up 18.4%QoQ. The rise in income was driven mainly by sector heavyweights Arabtec Holding (Arabtec) and Drake & Scull International (DSI); however, Al Khodari Sons (AKS) registered a decline in profit during the quarter. The increase in net income is mainly ascribed to a rise in operating income, which surged by more than five times.

Order backlog rises modestly 2.0%QoQ in 1Q13

Total value of projects awarded declined to USD0.9bn in 1Q13 from USD2.1bn in 4Q12. The sudden decline is ascribed to a steep fall in Arabtec’s order receipt to USD0.2bn in 1Q13 from USD0.9bn in 4Q12. Thus, order backlog of the sector increased marginally by 2.0%QoQ in 1Q13, after rising 8.3%QoQ in 4Q12. Rise in order backlog was driven by AKS and Arabtec, which added USD0.4bn to the incremental order backlog in 1Q13. UAE contractors remained largest in terms of order backlog, led by Arabtec, DSI, and Depa Limited (Depa), which constituted 49.2%, 21.7%, and 13.9% of the sector, respectively.

Surging cost and stiff competiton continues to dent margins

Rising construction costs and intense competition continued to plague the construction sector in 1Q13. Construction costs (cost-of-sales) increased 24.4%YoY, while operating costs rose 8.0%YoY during 1Q13. However, costs subsided on a QoQ basis. Construction costs fell 14.2%QoQ, while operating costs declined 26.3%QoQ.

Run up in stock price of contractors

In the past three months there have been significant run up in the stock prices of contractors. Drake and Scull stock rose by 31% in the past three months amid speculation builder Arabtec may buy a stake in the company, a prospect denied this month by management of both Arabtec and DSI. Alkhodari stock price on the other hand witnessed run up after it received significant number of new awards during 1Q13. On a QoQ basis the new awards almost quadrupled to SAR1.1bn while backlog rose by 31%. Arabtec stock price which witnessed significant run down after announcement of the right issue also witnessed a good ride in the last month after the terms of its right issue clarified. The stock price also rose because of rumors regarding stake purchase of DSI which later became untrue.

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