- Both Gamuda and WCT announced that a 51:49 JV unit of theirs has been ordered to pay Bahrain Asphalt Establishment (BAE) a sum of RM52mil. The final award due to BAE had been fixed by the arbitral tribunal pursuant to the International Chamber of Commerce Rules of Arbitration. This covers:

      - QAR 46mil (RM38mil) – being the sum accruing to BAE net of a QAR 10mil counter-claim which the JV is entitled; and

      - QAR 17mil (RM14mil) for legal/other cost as well as arbitrators’ fees (US$412k)

- The suit came about after BAE had in March 2010 filed a claim over disputes for subcontractor works for the granular sub-base and flexible pavement works during the construction of the 43km-long Dukhan Highway (from Shahaniya to Zekreet).

- We note that the total compensation of RM52mil that the JV is liable is slightly below half that of the initial claim of RM101mil that BAE had originally filed.

- This include alleged:- (i) Prolongation, escalation, collateral & associated costs for 728 days’ delay in completion of the sub-contract works (QAR 95 mil); (ii) Overcharge/wrongful deductions (QAR 13 mil); (iii) Wrongful deduction for supply of bitumen; and (iv) Further unquantified sums for legal costs, arbitration costs and interest.

- The news may weigh down on both stocks in the near term, and just comes on the heels of some negative corporate developments recently. Just last week, the MMC-Gamuda JV was ordered to compensate Wayss & Fraytaq following arbitration proceedings for subcontracted works at the north tunnel drive of the SMART tunnel project (Gamuda’s effective share: RM91mil).

- As for WCT, it had received notification from the Omani government, notifying the WCTOman Roads Engineering JV (80:20) that it had decided not to proceed with the Batinah Expressway Package 2 job worth an estimated RM1bil.

- Based on their respective stakes in the JV, we estimate the claims to result in a 4% reduction in Gamuda’s earnings for FY13F, and 16% for WCT – with revised fair values of RM4.35/share and RM2.60/share, respectively. We note however the charges are one-off in nature as the highway has already been completed and delivered to the Qatar government.

- Also, there could be potential write-backs for both companies if the JV is successful in making claims against the Qatar government on the main Dukhan Highway contract. However, a firm decision may not materialise for now.

- In any case, we continue to view any recent share price weaknesses as a buying opportunity for Gamuda and WCT ahead of an expected re-acceleration of domestic contract flows post the 13th General Election. Importantly, operating fundamentals and existing order book visibility remains largely intact.

Source: AmeSecurities