News

Yesterday WCT finally announced the outcome of the arbitration that the group and its JV, Arabtec initiated for the Nad Al-Sheba Racecourse Project in 2009. The tribunal awarded to and in favor of WCT, and orders Meydan to pay WCT, a total of AED1.15b or RM1.20b.

The total amount of AED1.15b includes: (i) total claims of RM1.11b relating to amounts owing for work done, repayment of performance bond, loss of profit, damages, interests, etc., (ii) arbitration costs of AED8.2m, and (iii) legal costs of AED26.7m.

As at 1Q15, the carrying value of receivables related to this contract is worth AED318m or RM330m.

Comments

We are positively surprised as we were expecting the arbitration to drag for next few years. While Meydan will be paying RM1.2b to WCT as a result of the arbitration award, note that there is RM330m receivables related to this project in WCT’s books. This implies a net cash amount of RM870m or RM0.71/share. In terms of timing, we understand management is pursuing the claim from Meydan as soon as possible. Furthermore, the group’s net asset value could increase to RM3.2b (RM2.62/share) from RM2.3b (RM2.11/share) currently after it receives the claims.

What would WCT do with the claims? Management has yet to decide what to do with the claims award. However, if we look at their balance sheet, which has a high net gearing of 0.7x as at 1Q15 (ex-rights is 0.67x), we believe WCT could utilize the money to: (i) pare down some borrowings, (ii) declare a special dividend, and (iii) fund landbanking CAPEX. Considering that the stock has lost some sheen over the years, we think that WCT may look to reward shareholders. We reckon that a 10% payout assumption of the net amount of RM870m as special dividends is reasonable while the remaining 90% might be kept for capex and paring down borrowings. If so, WCT could declare extra 7.0 sen special DPS. This translates into an additional dividend yield of 5.6% beyond their current dividend payout.

Outlook

We view this news as a “bonus” to the group as the claims certainly give significant impact to the group’s financials and potentially special dividend payment.

Elsewhere, despite the slowdown in the property market, the group’s construction division is still firmly backed by its strong external orderbook of RM2.6b that will last the group for the next three years.

WCT is also looking to secure more domestic jobs such as Petronas RAPID works (RM1.0b), TRX (RM200m), KL118 (Warisan Merdeka) (RM2.0b) and WCE highway.

Forecast

Core earnings remain unchanged as we expect the claims to be classified as one-off gains. Nonetheless, we increase DPS forecast to 12.0 sen from 5.0 sen for FY16 to reflect our base case of WCT distributing at least 10% of the net claims as special dividends. As such, based on the last share price, FY16 dividend yield is expected to increase to as high as 9.6% from 4.0%.

Rating

Maintain OUTPERFORM

Valuation

While waiting for further clarity on its plans for the claims, we reiterate our Ex-Rights SoP-based TP of RM1.81 (cum-rights TP RM1.95). Our Ex-Rights TP implies fwd-PER of 13.6x, within our small-mid cap target PER of 10-14x. Although our TP remains unchanged, this implies a higher total return of 54.4% compared to 48.8% previously, based on our potentially higher FY16E dividend.

Risks to Our Call

Lower-than-expected new contracts flows

Lower-than-expected construction margins

Lower-than-expected property sales

Source: Kenanga Research - 9 Jul 2015