News     WCT announced that its 51:49 joint venture entity Gamuda-WCT counter claims against Bahrain Asphalt Establishment’s (“BAE”) arbitration has failed and dismissed, while Gamuda-WCT JV is ordered to pay BAE a total sum of RM53.6m for BAE’s claims, legal and other costs.

Comments      We are surprised with the news we did not expect that BAE would be awarded with their claims against the Gamuda-WCT JV.

To recap, the Gamuda-WCT JV entered into a subcontract with BAE on Feb-06 for the works known as the granular sub-base and flexible pavement works for the JV’s project known as “Dukhan Highway from Shahaniya to Zekreet," in Qatar. However, due to the delays on the main project, BAE’s sub-contractor works are also affected. Hence, BAE was awarded RM38.1m for its claims on cost overruns, legal costs of RM14.3m and other costs of RM1.3m totalling to RM53.6m. In the meantime, the Gamuda-WCT JV is still pursuing its claims with the Qatar’s Public Works Authority in respect for the main contract.

We are negative with the news as it would dampen WCT’s earnings in FY13. As we understand, WCT’s total loss on the arbitration would be RM26.3m out of the total cost of RM53.6m given their 49% stake in the JV.

Outlook    To date, WCT has secured a total of RM484m worth of contracts.

Going forward, we believe local construction sector remains bright for WCT as we are expecting more high impact infrastructure projects to be rolled out in 2HFY13 post General Election.

Hence, we are maintaining our RM1.0b orderbook replenishment assumption for FY13.

Forecast     As such, we are reducing our FY13E earnings forecast for WCT by 11% from RM184.2m to RM164.5m as we factored in the additional one-off litigation cost of RM26.3m. However, there are no changes to our FY14E estimates.

Rating      Maintain MARKET PERFORM

We maintain our MARKET PERFORM recommendation on WCT at this juncture, underpinned by the series of unfortunate events from the Middle East recently and also the unresolved contract dispute on Nad Al Sheba Racecourse project.

The next re-rating catalyst would be an orderbook replenishment exceeding RM1.0b, successful claims on the Dukhan highway project and also favourable resolution on the Nad Al Sheba Racecourse project.

Valuation      We tweaked our TP higher by 6% from RM2.30 to RM2.43, based on our revised SOP target, as we rolled forward our valuation to FY14E.

Risks     Delays in construction projects. Rising building material costs.

Source: Kenanga