24/10/2014 08:41 AST
Major Saudi Arabian construction firm Abdullah Abdul Mohsin Al-Khodari and Sons says it may double its capital spending in coming years to cope with the work it hopes to do on the country’s big infrastructure projects.
Saudi Arabia’s SR855 billion state budget plan for 2014 slowed total spending growth to the lowest rate in a decade as the government became more fiscally cautious. But it still included funds to build 465 schools and 11 hospitals, and a 25 percent jump in spending on infrastructure such as roads, railways, ports and airports.
Although global oil prices have tumbled to four-year lows in the last few months, below levels which analysts believe the Saudi government needs to balance its budget, industry executives do not expect major cutbacks in spending.
The government has huge fiscal reserves which it can use if necessary to maintain spending, while it views many of the projects as vital to improve public welfare — thus ensuring social peace — and to diversify the economy beyond oil.
“Most of these projects will go into the tens of billions of riyals,” the construction firm’s CEO Fawwaz Al-Khodari said in an interview for the Reuters Middle East Investment Summit.
“The scope relevant to Al-Khodari in each of these projects could easily reach 7 or 8 billion. I am not necessarily saying that is what Al-Khodari would capture, but that’s the potential of any one project...
“So when Al-Khodari gets its share, it will have a substantial and material impact on financials, and ultimately a positive impact on the bottom line.”
Such projects will require raising annual capital expenditure above the levels of SR150 million to SR250 million seen in past years, Al-Khodari said.
“From one project alone Al-Khodari could double its capex — so the trend upwards in capex is a fair assumption.
The company reported a 23 percent year-on-year rise in third-quarter net profit to SR15 million, as its contract backlog fell to SR3.36 billion as of Sept. 30 from SR3.99 billion a year earlier.
Al-Khodari said Saudi government spending on projects was only likely to drop if oil prices slumped for at least two years.
“For the immediate future, I see no slowdown in the projects stream. However, should the oil price decline continue and not rebound for a couple of years, then I would expect a more conservative spending policy to be employed.”
The stock market appears to endorse Al-Khodari’s expectations; the company’s shares are up 82 percent so far this year, outpacing an 18 percent rise by the main Saudi market index .TASI.
As the employer of about 20,000 workers, Al-Khodari has been acutely vulnerable to Saudi Arabia’s sweeping labor market reforms, which aim to limit the use of foreign workers and encourage the hiring of Saudi citizens by the private sector.
In 2011 the government imposed penalties on companies which failed to meet quotas for hiring Saudis, who tend to cost more to employ; a year later, it introduced a levy of 2,400 riyals per year for every foreigner which a company employed above the number of its Saudi workers.
In April this year Al-Khodari said his firm’s profit margins had been eroded by more than 50 percent under the reforms, with an average annual cost impact of SR50 million.
In his latest interview, however, Al-Khodari said the impact had started to fade and that by the end of 2015 there would be very little effect on his company’s financials, as contracts negotiated before the reforms exited the revenue stream.
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