Aabar stake purchase gives boost to Arabtec

Analysts warned that Arabtec, already up 112 per cent this year before yesterday's announcement, was not an attractive buying opportunity. Silvia Razgova / The National

Arabtec shares surged 15 per cent to the market limit yesterday after Abu Dhabi's Aabar Investments raised its stake to more than 10 per cent.

But analysts warned other investors not to join the buying rally in a company that many say is already overpriced.

Aabar Real Estate, a unit of the government investment vehicle, was not previously a disclosed shareholder in Arabtec. But it now owns 5.13 per cent of the country's biggest builder by market value, according to a filing on the Dubai stock exchange.

Aabar Petroleum Investments Company, another unit of Aabar Investments, which is based in Abu Dhabi, holds 5.32 per cent, according to the filing.

That is up from a previous increase to 5.28 per cent announced on March 6.

The news catapulted Arabtec shares up 15 per cent, the limit for a one-day increase on the Dubai Financial Market (DFM) General Index, to close at Dh3.45.

Retail investors piled into the stock in the hope Aabar was building a position to take over the company and give shareholders a windfall.

However, analysts warned that Arabtec, already up 112 per cent this year before yesterday's announcement, was not an attractive buying opportunity. The current price also made a takeover unlikely.

"Irrespective of anyone's intentions, Arabtec has considerably overshot in terms of valuation," said Julian Bruce, the director of institutional sales trading at EFG-Hermes in Dubai. "Any acquisition at these levels could be deemed extravagant."

Previous takeover talks between the two companies broke down in 2010 after Arabtec pulled out. Ziad Makhzoumi, the chief financial officer for Arabtec, said last month the company had no plans to resume talks.

The Securities and Commodities Authority (SCA), which regulates public companies on the DFM and the Abu Dhabi Securities Exchange General Index, requires a single owner of 10 per cent or more of any listed company to notify the market if its intention is to buy a further 20 per cent or more.

Because Aabar has increased its stake via two separate legal entities, the DFM is not characterising its ownership as from a single entity, meaning it is not subject to the SCA rule, people close to the matter have said.

The DFM, Aabar and Arabtec did not respond to requests for comment.

Analysts from Beltone Financial and NBK Capital assessed Arabtec's stock as "overvalued" and downgraded it to "sell" even before yesterday's huge increase. A "sell" rating means the stock is expected to underperform against its price compared to the market average and comparable stocks in the same sector.

"Arabtec remains overvalued in our opinion. The recent, massive share price rise [prior to yesterday], driven largely by, in our view, empty speculation, means the company's valuation remains very stretched," analysts at NBK said in a note last week.

After Aabar's disclosure last month that it had upped its stake in Arabtec, the stock fell 7.9 per cent as shareholders who had watched the value of their holdings rise on rumours of a planned takeover sold on the Aabar disclosure to lock in their profits.

Arabtec reported it had a buoyant end to last year. Net profit of Dh165 million (US$44.9m) beat consensus expectations and those of several separate analysts by a significant margin.

Bottom line for the quarter showed substantial growth compared with the two previous quarters. A 16.1 per cent margin on fourth-quarter, pre-tax earnings was the highest since the same period in 2009 and the second-highest in the company's history as a listed entity.

However NBK said the results were flattered by variation orders - changes made by architects in the construction of buildings - and lower provisioning for bad debts, and should not be seen as a harbinger of things to come for coming quarters.