UAE contractors expect tougher market and margin squeeze in 2016

Overall, contracting is going through a very tough time, primarily because of a liquidity crisis, said Nishit Lakhotia from Securities and Investment.

Contracting work may dip in 2016, but work will pick up in subsequent years as Expo 2020 approaches. Antonie Robertson / The National

Contractors fear a difficult year in 2016 as project delays and a lack of new awards hurt their cash flow.

The UAE’s three listed contracting companies – Arabtec, Drake & Scull and Depa – all reported lower revenues, and the first two also declared losses as a result of writedowns against previously booked work.

“Overall, contracting is going through a very tough time, primarily because of a liquidity crisis,” said Nishit Lakhotia, an analyst with Bahrain-based Securities and Investment Company.

“Also the other thing is decision-making. Contracts are not being awarded on time, or work is not getting certified on time. That impacts on your costs – especially labour costs.”

Christopher Seymour, Middle East head of markets for EC Harris, believes that it would be dangerous to read too much into the industry just by looking at the results of its handful of listed companies.

”You’ve got to make sure that one contractor’s bad project doesn’t cover the whole industry, but there is evidence that there is a redirection of funding,” said Mr Seymour.

“Obviously, the oil price being lower means that the public purse is certainly reviewing its strategy in terms of redirecting funds – specifically at those things that will help GDP. That will mean that some projects slow down or are reviewed and other projects come on.”

Youssef Ghantous, UAE country head for Consolidated Contractors Corporation, said: “I think it’s not a good picture. It doesn’t look like it’s going to get better. In the meantime, the backlog is going down.”

He said the forthcoming round of budgets would give a clearer idea of where priorities lie, and he hopes that, as happened in Abu Dhabi in 2009, governments take advantage of low commodities prices and competitive tender rates to commission important infrastructure.

Mark Andrews, managing director of Laing O’Rourke’s Middle East business, said that although there had been a lot of tender activity in Dubai since the summer, this had not translated into contract awards.

“You try to be selective and bid on things that are real where the clients have got funding in place, and then things go quiet and you don’t quite know what’s going on,” he said.

“I think many other contractors have seen the same – things have stalled a bit either because of funding or because plans are changing. I also get a sense talking to the consultants that their workloads are down, which means there’s potentially a bit of a lull going forwards.”

This lack of clarity is “frustrating” for contractors, he said, as it makes it difficult for them to assess future orders and plan resources accordingly.

“I’m hopeful that some of these projects in Dubai start to move next year. They have to if Expo 2020 is going to get delivered. I also hope that things will start to happen in Abu Dhabi, which has been very slow for some time now.”

Colin Timmons, general manager of Abu Dhabi-based Al Fara’a Contracting, said that macroeconomic headwinds in the region, such as the declining oil price and the conflict in Yemen are bound to have an impact.

“We are seeing that Abu Dhabi has slowed down in terms of tenders that are being released. There are fewer tenders and they are smaller in value.”

He fears a dip in contracting in 2016, but believes work will pick up in subsequent years as Expo 2020 approaches. As a result, he says contractors need to be cautious in how they price bids.

“If we commit to many jobs in the early part of next year at a low entry price for jobs with long build periods, then the market changes favourably and margins improve and we could be stuck,” said Mr Timmons.

“Anyone who thinks it is going to be easy, for me, isn’t close enough to the market. There will be fewer real jobs and when you do get the opportunity to deliver a project it will be challenging to generate a good return as entry prices are so low.”

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