News      Yesterday, WCT announced that it had won a contract award of RM170m from 1MDB Real Estate for Zone 3 on the proposed earthworks, retaining walls and foundation works for the phase 1 development of the Tun Razak Exchange (“TRX”).

Comments      We are rather surprised with the small RM170m earthworks contract award sum as we are expecting a single contract size award of RM1.0b for the Tun Razak Exchange’s earthworks from 1MDB.

The scope of works includes site clearance, earthworks & rock excavation, secant pile wall, grouting works and bored pile & basement raft for the next 26 months.

Following the contract award, its external outstanding order book will increase by 6% to c.RM2.8b, which will provide 3-year earnings visibility for the group. To date, WCT has successfully secured a total order book replenishment of RM485m, inclusive of this project, which makes-up 49% of our order book replenishment assumption of RM1.0b. Hence, we maintain our assumed replenishment for FY13.

We expect the project to yield operating margins of 10%-12%, which would be in line with our current construction margin assumptions. Assuming a net margin of 8%, the project will contribute RM13.6m for the next 26 months which only accounts a minimal 2% or 0.3 sen/share to our FY13E EPS .

Outlook      Going forward, we continue to believe that there will be more earthwork packages to be awarded for the 28-hectare land in TRX in the near term as this is only the first contract award for development works at TRX.

Forecast     No changes to our earnings estimate, as the new contract is part of our orderbook replenishment assumption.

Rating     Maintain MARKET PERFORM

We are maintaining our MARKET PERFORM recommendation given the limited capital upside to our Target Price of RM2.30. This is inline with our NEUTRAL rating on the Construction Sector.

Valuation     No changes to Target Price of RM2.30, which is derived based on a SOP methodology.

Risks     Delays in construction projects.

Rising building material costs.

Source: Kenanga