Arabtec overvalued despite sharp decline

What's Down: Arabtec may have reported soaring profits, but analysts warn that its share price is still severely overvalued.

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Arabtec's shares took a dive last week as investors decided that the stock's sharp rise defied reality.

The Dubai construction firm may have reported soaring profits, but analysts warn that its share price is still severely overvalued.

That pushed the stock down 5.1 per cent on Wednesday and 6.6 per cent yesterday.

The company generated net profits for the first quarter of Dh84 million compared with Dh26.6m during the corresponding period last year.

It has been the third-best performing stock on the Dubai Financial Market General Index, rising 108.6 per cent to Dh2.95 since the start of the year.

At least some of that run-up can be attributed to interest from Abu Dhabi's Aabar Investments, which was revealed to have taken a 10.5 per cent stake in the company recently.

Arabtec's stocks were lifted further by an announcement it is part of a consortium that is the preferred bidder for the construction of the Midfield Terminal at Abu Dhabi International Airport.

But following the release of earnings, the company's stocks are now heavily overvalued, analysts from NBK Capital wrote in a research note.

"This is a significant award for Arabtec but it was widely expected and, in our view, accounts for some of the share's meteoric rise so far this year," the report said. "As such, it will provide some upside to our valuation but not nearly enough to justify the current share price."

NBK has adjusted its fair value price for Arabtec from Dh1.84 to Dh1.75 per share. That is 40.6 per cent below Arabtec's current price.

Morgan Stanley puts a price target on the stock even lower at Dh1.38 each, 53.2 per cent below Arabtec's closing price yesterday.

The investment bank also thinks it is unlikely current high levels of profitability can be maintained.

"We do not see an inflection point for margins as yet, and believe the high margin in [the first quarter this year] is likely unsustainable in the near term," wrote Muneeba Kayani, an analyst at the US investment bank.

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