KUALA LUMPUR: The abrupt cancellation of the RM4.6 billion Meydan Racecourse job awarded to WCT-Arabtec in Dubai reinforces concerns over the weakening financials and growing risks for contractors with jobs in the Middle East.

The Middle East has been viewed as a safe haven by many construction companies even as the global economic downturn unfolded. But that is no longer the case, according to research houses.

For one, Aseambankers said the cancellation of the Meydan Racecouse contract raised speculation if Dubai’s weakening financial position was the real reason behind it.

“Meydan also raises questions as to whether other construction jobs in the Middle East could meet with a similar fate,” it said in a research note here yesterday.

The research house said Dubai’s financial problem had already been highlighted in October 2008 when Moody’s cautioned on the kingdom’s soaring debt of at least US$47 billion more than the gross domestic product (GDP). This left Dubai, the second largest state in the United Arab Emirates (UAE), vulnerable and reliant on Abu Dhabi, the capital of UAE, to bail it out in the event of a systemic shock.

Besides WCT Bhd, IJM Corporation Bhd and LCL Corporation Bhd have ongoing jobs in Dubai. Others like Gamuda Bhd, Sunway Holdings Bhd and Muhibbah Engineering Bhd also have jobs in the Middle East.

WCT’s 50:50 joint venture (JV) with Emirates-based Arabtec Construction LLC was awarded the build-only contract by Meydan for the construction of main building works, external works and infrastructure works in September 2007.

“Although the contract was awarded by privately held Meydan LLC which is ultimately held by Sheikh Mohammed Rashid Al Maktoum, the ruler of Dubai, it is difficult to distinguish ruler-owned from government-owned projects, in the kingdom where both are usually viewed as one,” said Aseambankers.

The research house said the Meydan episode was the second stark reminder of the risk of overseas projects for Malaysian contractors, with the first one being the Sudan Melut Basin project where contractors like Ranhill Bhd, Nam Fatt Corporation Bhd and PECD Bhd incurred substantial losses due to cost overruns, on unfamiliar “construction conditions” in Sudan.

On the other hand, ECM Libra said the cancellation of WCT’s Meydan Racecourse contract might not necessarily indicate that jobs in the Middle East faced heightened risks of cancellation, as the disputes of the contract could very well be project-specific.

“However, we would like to highlight that the Middle East is not spared by the global economic slowdown and is therefore likely to see slower construction activities as the property sector in the region cools down,” it said.

The research house maintained its underweight call on the construction sector. However, it reiterated its valuations and calls on construction companies under its coverage, like Gamuda, IJM Corp, Muhibbah and Sunway Holdings.

Among them, ECM Libra said IJM and Gamuda had the least exposure to the Middle East while Sunway Holdings and Muhibbah had significant exposures exceeding 40% of their total order books.

“Nevertheless, based on our conversation with management of construction companies under coverage, we noted that work progress of jobs in the Middle East is generally on schedule although extension of completion date is quite common,” it said.

The research house said collection of progress billings was generally on time except in Qatar where collection period as now three to four months versus two months previously.