WCT Bhd - Meydan civil suit BUY

- Maintain BUY on WCT with an unchanged fair value of RM3.05/share, pegging the stock at a 15% discount to its sum-of-parts value. WCT announced that Meydan L.L.C launched a counter-claim via a civil suit against the WCTArabtech JV for a sum of AED3.5bil on 14 June 2012. WCT has an effective 50% stake in the JV.

- The civil suit was initiated after the arbitration tribunal had on 9 June 2012 rejected Meydan’s submission that the timeline for the proceedings had allegedly expired.     

- The arbitration proceedings were initiated after Meydan had cancelled the Nad Al Sheba Racecourse contract in Dubai – for which the WCT-Arabtec JV was the main contractor. The contract value was estimated at ~RM4.6bil or AED 5.3bil (1 RM=1.15 AED). Physical works undertaken by the JV had reached 55% when the project was cancelled (main 1km-long grandstand: 95%) in early-2009.

- WCT’s ongoing exposure to the Middle East mainly comes from the Qatar administrative building job, where the unbilled amount was ~RM1.1bil or 48% of its external order book as at 31 March 2012.  

- We do not expect immediate closure to this protracted case, and prefer to maintain our earnings forecast/stock call pending further details. Backed by its astute  track record, we believe WCT’s order book prospects remain bright in the Middle East. The main focus is on the oil-rich Gulf regions such as Abu Dhabi, Qatar and Oman.      

- Rather, we believe investors are beginning to warm up to WCT’s rising order book momentum. Earlier this month, WCT clinched another RM73mil contract at Vale’s iron ore distribution facility at Teluk Rubiah, Perak – where it is already undertaking an earthworks package (RM115miI) secured last year. 

- The Vale industrial contract brings total wins secured YTD at RM700mil vs. RM187mil for FY11. This suggests further upside to our new order book target of RM1bil for FY12F.

- We foresee more near-term job opportunities coming:- (i) Oman Expressway - RM1bil, effective stake 80%; (ii) MRT station works (2 packages @ RM200mil-RM300mil each); (iii) PLUS Highway upgrading (RM400mil-RM500mil; NilaiSeremban stretch); and (iv) additional infra works at the Vale's project (~over RM100mil). 

- We also acknowledge that WCT is undergoing a transformational change in its earnings base moving forward – the latest being the successful launch of Paradigm Mall - launched last month. Such a move marks WCT’s quest to expand its recurring income base to 25% of group operating profits by FY16F from 15% in FY11.

Source: AmeSecurities