WCT announced that the Court of Arbitration in Qatar has awarded a sum of QAR133m (RM153m) against the company in favour of its subcontractors. WCT will be recognising an additional provision of RM116m resulting in a reported LATMI of -RM27.6m for FY19 (from reported PATMI of RM88.8m). Maintain forecasts and SELL with lower SOP-driven TP of RM0.38 (from RM0.65) after increasing SOP discount to 60% (from 40%) to reflect: i) heightened risk premium from elevated market uncertainty and ii) increasingly difficult tender environment due to potential delays in infra jobs; further exacerbated by recent collapse in oil price which could limit government’s fiscal flexibility in rolling out new infra jobs.

NEWSBREAK

Material litigation. WCT announced that the Court of Arbitration of the International Chamber of Commerce in Qatar has awarded a sum of QAR133m (RM153m) against the company in favour of Trans Gulf International Electro - Mechanical WLL, Powermech Engineering WLL and Trans Gulf International Electro - Mechanical WLL & Powermech Engineering WLL JV, all of which were engaged as subcontractors in respect of certain mechanical, electrical and plumbing related works for the Ministry of Interior’s Head Quarters Project in Doha, Qatar. Recall that earlier, WCT had deducted from the respective subcontractors’ claims due to alleged failure to perform the contractual duties. We understand WCT intends to challenge the validity and enforcement of the final award.

HLIB’S VIEW

Impact. The company will be recognising an additional provision of RM116.4m (after tax) arising from the litigation in its FY19 financials resulting in a reported LATMI of - RM27.6m when annual report is released (from reported PATMI of RM88.8m). For illustration purposes, a settlement of the damages could increase WCT’s net gearing (treating perpetuals as 100% debt) to 1.03x from 0.99x (based on shareholders’ equity post-provision). Nonetheless, we take comfort in the company’s earlier retirement of its RM800m MTN (retired by perpetual sukuk issuance). Based on our understanding, the perpetual offers a deferral option to its scheduled distribution, providing WCT with much needed cash flow relief.

Orderbook. WCT’s estimated outstanding orderbook stands at c.RM5bn translating into a healthy c.4.0x cover. The outstanding amount may expand by RM1bn once the letter of award for construction of Pavilion Damansara Heights Development- Parcel 2 is finalised.

De-gearing. WCT has recently exhausted its proposed private placement leaving little room to manoeuvre for its de-gearing exercise. We reckon the failure to place shares emanates from rather unattractive valuations to the management. In our view, this leaves the company with only the REIT option (targeting by mid-2020) to significantly bring down its gearing. Other peripheral on-going measure is its land sale initiative in which FY19 brought sales value of only RM110m. Overall, efforts to deleverage remains challenging unless the REIT option can be accelerated. We reckon its retail and hospitality related assets may be affected by Covid-19 which may further delay its REIT monetisation.

Forecast. Maintained as additional provision does not impact our core earnings estimate of RM79m for FY19 and forecasts for FY20-21.

Maintain SELL, TP: RM0.38. Maintain SELL with lower SOP-driven TP of RM0.38 (from RM0.65) after increasing SOP discount to 60% (from.40%) to reflect: i) heightened risk premium from elevated market uncertainty and ii) increasingly difficult tender environment due to potential delays in infra jobs; further exacerbated by recent collapse in oil price which could limit government’s fiscal flexibility in rolling out new infra jobs. We remain concern on WCT’s balance sheet risks amidst a cloudy sector outlook.

Source: Hong Leong Investment Bank Research - 23 Mar 2020