News  WCT Holdings Bhd (WCT) announced yesterday that it has accepted a Letter of Award (LOA) from Petronas Refinery and Petrochemical Corporation Sdn Bhd to undertake “Common Construction Access and Permanent Roads” project within the RAPID Site at Pengerang, Johor. The contract is worth RM341.9m.

Comments  After a dry period of more than six months, WCT has secured its first job for 2014. We estimate this project will boost its current orderbook to RM2.1b which will provide the group earnings visibility for the next three years.

 Assuming pre-tax margin of 9%, and about 3 years to complete, this project will contribute RM7.7m per annum to the group’s bottomline until 2017.

More to come? We understand that this project is only one of many road infrastructure projects being awarded by Petronas given the huge area of entire RAPID project site of 6,242-acre. Hence, we would not be surprised if WCT secures more road packages from Petronas in the foreseeable future after it successfully executed this first package. This conjecture is based on observation of Gadang Bhd (TAKE PROFIT; FV: RM2.00). Recall that Gadang was first awarded the 1st Phase of the earthworks project in RAPID in 2012 and subsequently, after two years, despite the open tender, Gadang still managed to secure the 2nd Phase of the project due to its strong track records and familiarity with the project.

Outlook  As the clock is ticking (now close to August already), we remain wary that WCT could not meet our expectation of RM1.5b new contracts assumption by end-FY14. This project accounts for only 23% of our assumption of RM1.5b.

 On a positive note, WCT is eyeing a few key projects in Malaysia (i.e. WCE (which main contract has already been awarded), other RAPID infrastructure works, Kwasa Damansara Land civil works, and Putrajaya building works) and in the Gulf States, i.e. Qatar infra works.

Forecast  No change in earnings as the contract value is well within our estimates. Nonetheless, we might revise downwards our earnings estimates should the group fail to meet our new contracts expectation in the near-term.

Rating Maintain MARKET PERFORM

 Despite the strong orderbook which will boost its earnings growth at least for this year and next, we reiterate our MARKET PERFORM rating for now due to the lacks of near-term catalyst.

Valuation  Maintain our SOP-based TP at RM2.32, implying 13.5x of fwd-PER (in-line with mid-cap construction peers of 13-15x).

Risks to Our Call Lower-than-expected orderbook replenishment

 Slower-than-expected progress in construction projects

 Higher-than-expected input costs.

Source: Kenanga