We are downgrading FY13-14 forecasts by 6-7% and fair value by 6% to RM1.65 from RM1.76 while maintaining our Sell call following the cancellation of its RM1bn highway job in Oman secured in Aug 2012. While we expect better appetite for construction stocks post the 13th general election, we believe WCT’s valuations have run ahead of its earnings at the current price.

Omani job cancelled. WCT said that the Omani government had decided “not to proceed with” the RM1bn Package 2 of Batinah Expressway awarded back in Aug 2012 to an 80:20 JV between WCT and local partner Oman Roads Engineering Company LLC. It also said that it would “respect and adhere to the decision” (that we presume, implies that no legal action will be taken against the project owner). We understand that preliminary expenses incurred on the project will be reimbursed. The cancellation has effectively eroded WCT’s current outstanding construction orderbook by RM781m (about 80% share of RM1bn) or 20% to RM3.2bn (see Figure 1) from RM4bn.

Forecasts. We are downgrading FY13-14 net profit forecasts by 6-7%, having removed the project from our forecasts.

Risks to our view. These include: (1) New construction contracts secured in FY13-14 to surpass our target of RM1.5bn p. a. (RM315m secured in FY13 YTD) ; (2) Lower-than-expected input costs; and (3) Good execution of overseas jobs.

Maintain Sell. We believe investors should stand by in wetsuits, ready to take the plunge and dive for value in the event of a heavy selldown on construction stocks ahead of the 13th general election. After the 13th general election when the dust settles, over a longer investment horizon, we believe investors should refocus on sector fundamentals that are reasonably attractive underpinned by a construction upcycle. However, at the current price, we believe WCT’s valuations have run ahead of its earnings. We reduce our fair value for WCT by 6% to RM1.65 (from RM1.76) based on 13x revised fully-diluted FY13 EPS of 12.7sen, in line with our benchmark 1-year forward target PER of 8-13x for the construction sector.

Source: RHB