News

• Arbitration request from subcontractors… WCT has been served with a request for arbitration from the Court of Arbitration of the International Chamber of Commerce. The claimants that filled the request were (i) Trans Gulf International Electro-Mechanical, (ii) Powermech Engineering and (iii) the JV-co between (i) and (ii).
•   …related to a Qatar job. The claimants were WCT’s subcontractors for the contract to build the Ministry of Interior HQ in Doha, Qatar. A total sum of QAR181.6m (RM214.1m) is being claimed involving alleged sums due to the subcontract and further unquantified sums for legal costs, arbitration costs and charges.

Comments

• Negative surprise. Management indicated to us that the claimants were involved in M&E and plumbing related works for the HQ job. Although the job has been completed, management has yet to receive full payment from the client (i.e. the Government of Qatar). As a result of the outstanding payments owed to WCT, it has also not paid its subcontractors (i.e. the claimants) in full.
• How much owed? We gather that RM538m (68%) of WCT’s RM791m receivables as at 1QFY17 is from the Middle East, majority of which is related to the Ministry of Interior HQ project.

Risks

• Inability of WCT to recover the outstanding payments from its client coupled with a negative arbitration outcome requiring it to pay the subcontractors (i.e. the claimants).

Forecasts

• Should the abovementioned risk factor pan out (the worst case scenario), this would reduce our FY17 earnings forecast of RM121m to a loss of RM93m. However, we would treat this arbitration claim as an exceptional item and hence, leave our core earnings forecast unchanged. Furthermore, arbitration proceedings are usually a long drawn affair.

Rating

Maintain HOLD, TP: RM2.15

• While WCT’s earnings are poised for a recovery that will be driven by its sizable orderbook, we remain cautious on its erratic earnings delivery and high net gearing. This recent arbitration issue also poses as a negative surprise.

Valuation

• Our unchanged SOP based TP of RM2.15 implies FY17-18 P/E of 24.7x and 20.8x respectively.

Source: Hong Leong Investment Bank Research - 11 Jul 2017