WCT announced that it has managed to enter into a settlement with Meydan to receive net RM577m post-subcon repayment. WCT is providing a 35% haircut to Meydan. By our estimates, WCT will recognise a gain of RM200m progressively over three years and net gearing (including perps) could fall from 110% to 85%. Nonetheless, this has not factor in likely damage from EMCO and FMCO. In our view, WCT will preserve capital to meet sukuk redemptions due over the next few years. Overall, this development eases balance sheet pressure in the near term. Maintain forecasts. Maintain HOLD with unchanged TP of RM0.56 based on 20% SOP discount. We remain cautious stance as scale of balance sheet impact from ongoing EMCO and FMCO is uncertain. Catalysts: sizable contract wins and further deleveraging from land and inventory sales. Downside risks: larger than expected adverse impact from EMCO and FMCO.

NEWSBREAK

Closing a chapter. WCT announced that it has managed to enter into a settlement agreement with Meydan whereby WCT will receive a sum of AED726.6m (RM828.2m) representing a 35% haircut on the initial principal award sum of AED1.1bn (RM1.3bn) upheld by the Dubai Court of Appeal earlier this year. With this arrangement, WCT will be waiving off RM39.7m of legal-related expenses which was previously awarded under the final award.

HLIB’S VIEW

Settlement details. Under the settlement agreement, WCT will receive the payment in two batches: (1) AED279.5m (RM318.6m) on or before 20th July 2021 and (2) AED447.1m (RM509.7m) payable in 12 equal quarterly instalments of RM42.4m commencing 20th Oct 2021. In addition, Meydan has delivered a promissory note to unconditionally and irrevocably pay on demand the balance sum.

Impact. We see this as a much needed breathing space especially considering ongoing operational difficulties and upcoming sukuk redemptions. By our estimates, net amount attributed to WCT is RM577.1m as RM251.1m will go towards repaying project subcontractors. In respect of this development, WCT could record a cumulative gain of c.RM200m to be recognised over three years in tandem with the schedule of payments. For illustration (disregarding timing of cash flows), net gearing (treating perpetual as debt) could fall from 110% as of 1Q21 to a more manageable 85%. Nonetheless, we note that this is an optimistic estimate considering likely damage from EMCO and FMCO (phase 1). In our view, WCT will preserve capital to meet sukuk redemptions due over the next few years. Note that WCT’s cash balance has deteriorated from RM862m (2Q20) to RM466m (1Q21). Putting things in perspective, based on our understanding, WCT will have to redeem RM200m in FY21 (Oct), RM400m in FY22 (May & Oct) and RM300m in FY23 (Oct).

Forecast. Make no change to forecasts as financial impact will be deemed non-core.

Maintain HOLD, TP: RM0.56. TP is derived based on a 20% discount to SOP value of RM0.70. Our TP implies FY21/22/23 P/E of 66.4x/21.7x/10.0x. Despite viewing this development positively, we maintain our cautious stance as scale of balance sheet impact from ongoing EMCO and FMCO remains uncertain. Catalysts: sizable contract wins and further deleveraging from land and inventory sales. Downside risks: larger than expected adverse impact from EMCO and FMCO.

Source: Hong Leong Investment Bank Research - 15 Jul 2021