News

• Request for arbitration. WCT has received a Request for Arbitration from the Dubai International Arbitration Centre which was filled by Triumpher Steel Construction Group (“TSC”). Under the arbitration request, TSC had named Arabtec as the 1st respondent and WCT as the 2nd respondent.
• Knowing the players. Arabtec and WCT are a 50:50 unincorporated JV which previously undertook the construction of the Nad Al Sheba Dubai Racecourse. TSC was the JVs subcontractor in respect of certain steel works for the job. In the arbitration request, TSC is claiming AED107.7m (RM130.6m) from the JV following the its subcontract termination in 2009.

South Comments

• Rewinding the clock. Back in Sept 2007, the JV was appointed by Meydan LLC as the main contractor for the said racecourse project worth AED4.6bn. In Jan 2009, Meydan terminated the JV as contractor on grounds of work delays. An arbitration proceeding subsequently commenced between Meydan and the JV. Subsequently in July 2015, WCT won the arbitration proceeding and Meydan was required to pay the former a sum of AED1.15bn (RM1.4bn).
• Owings to subcontractors. When the JV’s contract was terminated by Meydan, the former consequently terminated its subcontractors on the job. Back then, management guided that any payment on work of its subcontractors was contingent upon the JV first receiving payment from Meydan and this was also stipulated in the subcontract agreements.
• Backed by impending payout. As we are not legal experts, we shall not attempt to predict the outcome of this recent arbitration request filled by TSC. However, should the arbitration outcome rule in favour of TSC, WCT can easily pay its 50% share of the claims amounting to AED53.9m (RM65.3m) from its impending arbitration award owed by Meydan of AED1.15bn (RM1.4bn).

Risks

• An unfavourable outcome of the TSC arbitration coupled with continued delays in WCT receiving payment from Meydan.

Forecasts

• Should WCT be required to pay its 50% share of the claims to TSC amounting to AED53.9m (RM65.3m), our FY17 earnings forecast would be reduced by 45% to RM80m (from RM145m currently). However, we would regard this as an exceptional item and hence, leave our core earnings forecast unchanged.

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Maintain HOLD, TP: RM1.97

• This recent development does not alter our view on WCT which needs to display better earnings consistency and reduce its gearing.

Valuation

• Our SOP based TP of RM1.97 implies FY17-18 P/E of 17x and 14.6x respectively.

Source: Hong Leong Investment Bank Research - 13 Mar 2017