Friday, April 20, 2007
Sitting atop $560 billion in trade surplus, with reserves rapidly approaching $3 trillion, the Persian Gulf states are plunging mountains of cash into infrastructure in an attempt to diversify their economies away from oil.
International materials and construction companies have stampeded to the area. Construction contracts in Dubai alone are valued at $300 billion. Currently, a quarter of the world's large construction cranes are located there.
The concrete that provides the foundations for Dubai skyscrapers and shopping malls comes from Holland, France, and Mexico. London's finest interior designers layered on the gold leaf that adorns Dubai's luxury hotels. The Dubai skyline first appeared as fantastical daydreams in the minds of British, Italian, and American architects.
However, picking which investment vehicle to enter the Gulf market is no easy feat.
The Cooperation Council for the Arab States of the Gulf likes to keep its contracts and projects in-house as much as possible. In Saudi Arabia, 90% of businesses are privately held, family-run businesses. In Abu Dhabi, most of the city's largest developments are in the hands of a single development company, owned entirely by the government and answering directly to the crown prince.
Contracts going to international firms are usually one-time (or, at most, two-time) deals. A perfect example of this is the Saudi government's deal with General Electric to supply a handful of turbines for Saudi power plants. Combined, the contracts amount to $370 million – barely a drop in GE's $163 billion revenue stream.
However, one company worth a look is South African contractor Group Five (G6N on the Berlin exchange).
Group Five is an infrastructure company with operations throughout Africa, Poland, Hungary, and Dubai. It's a fairly small company with only $700 million in assets on its balance sheet.
The company makes its money from several business segments, including property development, selling building materials, and construction. Construction is the real breadwinner, supplying over half of Group Five's annual revenues.
Group Five entered the Dubai market in December 2006, when it signed a $60 million contract with the Dubai government to build a central utilities complex and cargo warehouse as part of the Dubai International Airport expansion project.
The company has since signed two more contracts, one to build a duty-free warehouse at the Dubai International Airport, and another for an airfield at the Jebel Ali Airport City located 40 kilometers away. Combined, the two contracts are worth an additional $90 million.
Group Five only posts about $800 million in revenues a year. So Dubai operations account for roughly 15% of its annual revenues: a much larger percentage than most international firms.
I'm not telling you to buy this company. I'm simply pointing out that there is a mountain of money pouring into the desert. This trend could easily last a decade, and we need to be looking for opportunities. Group Five might be a good place to start.
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