News

• Favourable ruling. WCT has received the final outcome from the Arbitral Tribunal in Dubai regarding its termination as contractor by Meydan LLC for the Nad Al-Sheba Racecourse in early 2009. The Tribunal had found and ruled in favour of WCT that: (i) Meydan’s termination of WCT was unlawful, invalid and of no effect; and (ii) Meydan was not entitled to call on WCT’s performance bonds and must repay the same.

• Payment to WCT. The Tribunal has ordered Meydan to pay WCT a sum of AED1.15bn (RM1.2bn) which comprises of: (i) AED1.12bn (RM1.16bn) in respect of amount of works done, repayment of performance bonds, loss of profit, damages and interest; (ii) AED8.2m (RM8.5m) for arbitration costs; and (ii) AED26.7m (RM27.7m) for legal costs.

Comments

• A positive closure. The outcome of the arbitration proceedings is positive for WCT as it has been a long drawn process lasting over 6 years. As of 1Q15, the book value of the performance bonds and receivables under dispute amounts to AED318m (RM330m). This is much lower than the awarded sum by the Tribunal as WCT had made some write offs in the past. With this positive outcome, WCT could potentially write back RM867m.

• Net gearing to reduce. The cash influx from the arbitration award of RM1.2bn would reduce WCT’s net debt significantly from RM1.6bn (as of end 1Q15) to RM444m. On a proforma basis, net gearing would be cut from 72% to 20%.

Risks

• EPS dilution resulting from the rights issue.
• Stiff competition and uncertain implementation timing for its domestic construction tenders and weak property sales.

Forecasts

• If the full amount of RM867m were written back, this would significantly boost our FY15 earnings from RM128m to RM995m. However, as the write back is regarded as an exceptional item, we leave our core earnings forecast unchanged.

Rating

BUY () TP: RM1.73

• Needless to say, this recent development should bode well for WCT’s stock price sentiment. The recent share price weakness also provides a good entry level. As such, we tactically upgrade our rating from Hold to BUY with unchanged TP of RM1.73.
• The rights (WCT-OR, rights price: RM1.00) which last closed at RM0.21 offers a cheaper entry point.

Valuation

• Our TP of RM1.73 is based on the SOP method, implying FY15-16 P/E of roughly 16x.

Source: Hong Leong Investment Bank Research - 9 Jul 2015