News

The Arbitral Tribunal has decided that Gamuda-WCT JV (51:49% stake) shall pay Bahrain Asphalt Establishment (BAE) the following: 1) QAR45.7m (~RM38.1m) as net of claims; and 2) QAR17.1m (~RM14.3m) as legal and other costs and US$412k (~RM1.3m) for arbitrators’ costs.

Impact on FY13 earnings: Gamuda’s 51% stake in the JV works out to RM27.4m while WCT’s 49% stake in the JV works out to RM26.3m.

Meanwhile, Gamuda-WCT JV will continue to pursue its claims with the Government of Qatar in respect of the main contract.

Highlights

Recap... On Jul-05, the Qatar Public Works Authority awarded the 4-lane dual carriageway Dukhan Highway project which spans 43km from Shahaniya to Zekreet to Gamuda-WCT JV for QAR750m (~RM625m). BAE was the subcontractor for the granular sub-base and flexible pavement works and had filed an arbitration claim of QAR109m (~RM91m) against the JV on Mar-10 for compensation delays as the project which was supposed to be completed in 2 years was instead completed on Aug-09.

Small impact... The arbitration compensation impact is small, translating to ~1.3 sen/share (FD: ~1.2 sen/share; 4.8% of FY13’s earnings estimate), and ~2.4 sen/share (FD: ~1.9 sen/share; 14.3% of FY13’s earnings estimate) for Gamuda and WCT respectively. Although we are disappointed by the negative newsflow, both companies will have to improve their subcontracting management skills and documentation process to avoid such recurrence.

Unchanged forecast and TP... We are maintaining our earnings forecasts and TPs for both companies as we consider the arbitration impact as a non-core item. Hence, we maintain our HOLD call on Gamuda with a TP of RM4.28 and HOLD call on WCT with a TP of RM2.41.

Catalysts

• Upgrades: Higher than expected project values; faster than expected implementation of projects; and return of risk appetite.
• Downgrades: Delays in rolling-out new projects; and changes in ruling Government.

Risks

Execution risk; regulatory and political risk; rising raw material prices; and unexpected downturn in the construction and property sector. Rating/ Valuation OVERWEIGHT

Maintaining OVERWEIGHT stance in the sector but with emphasis on the mid/small cap construction companies given the more palatable valuations compared to the big caps.

Top Picks

• Kimlun (BUY; TP: RM2.18)
• HSL (BUY; TP: RM2.09)
• Mudajaya (BUY; TP: RM3.53) – Year end boost from power projects and India power plant
• MRCB (BUY; TP: RM2.15) – Opportunistic election play

Source: Hong Leong Investment Bank Research - 22 Apr 2013