News Yesterday, WCT announced that it was informed by the Ministry of Transport and Communications of the Sultanate of Oman on 6 April 2013 that the latter had decided to not to proceed with the construction of Batinah Expressway.
Comments The cancellation certainly caught us by surprise as it was unexpected. To recap, the project, with a total value of RM1.0b, was one of the single largest projects secured by WCT back in 2012, and make up 23% of its current outstanding external order book of RM3.4b.
We understand that the physical works for the construction of Batinah Expressway have yet to take place. Hence, we would not expect any provisions to arise from the project cancellation.
Outlook This cancellation of project will impact WCT negatively in the long-term. The project cancellation will reduce its outstanding external order book significantly by 23% from RM3.4b to RM2.6b. This will dampen its earnings prospect for the next three (3) years.
Despite the above unfortunate news for WCT, we continue to believe that the local construction sector outlook remains bright for the company as we are expecting more high-impact infrastructure projects to be rolled out in 2HFY13 post the General Election such as the Tun Razak Exchange and Rapid Pengerang earthworks.
Hence, we are maintaining our FY13 order book replenishment assumption of RM1.0b for WCT.
Forecast We have reduced our FY13-14E earnings estimates by 10%-8% to RM184.2m and RM217.8m respectively to factor in the cancellation of the Batinah Expressway contract above.
Rating Downgrade to MARKET PERFORM
Following the news, we are downgrading our recommendation to a MARKET PERFORM from an OUTPERFORM.
Valuation Our Target Price of RM2.30 is based on a SOP valuation, which we have reduced by 9% from RM2.52 as we lowered the construction earnings contribution.
Risks Delays in construction projects.
Rising building material costs.
Source: Kenanga
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