News

WCT-Oman Roads Engineering Company LLC JV (80:20% stake) has been informed by the Ministry of Transport and Communications of the Sultanate of Oman that they have decided not to proceed with the construction of Package 2 of Batinah Expressway.

Highlights

Recap... This road project, which comprises of dual 4 lanes spanning over 44.75km, was awarded to WCT-Oman Roads Engineering JV back in Aug-12 for OR123.2m (~RM980m).

Disappointment... The cancellation of the project is a disappointment for WCT as it comprises 77% of FY12’s construction revenue (after adjusting for its 80% stake worth ~RM781) and 22% of its previous outstanding order book of RM3.4bn. As such, WCT’s outstanding order book has been reduced to RM2.6bn but still provides earnings visibility over the next 2 years, which translates to 2.6x FY12 construction revenue.

Not much costs incurred We understand that actual works for the project has yet to begin; hence any preparation and mobilisation costs are minimal amounting to a few million Ringgit.

Risks

Execution risk; Regulatory and political risk (both domestic and overseas); Rising raw material prices; Unexpected downturn in the construction and property sector; and Failure in securing new sizable construction contracts.

Forecasts

FY13-14 earnings slashed by 6% to reflect the lost in earnings contribution from the Oman highway project.

Rating

HOLD

Although WCT’s construction division has disappointed over the past 2 years, we believe that the prospects for order book replenishment remains bright. The company has been adopting a prudent stance when bidding for projects instead of going in too aggressively. However, with less than 10% upside from our Target Price, we downgrade our call on WCT to a HOLD. We believe that WCT’s share price will have to retrace further for values to re-emerge.

• Positives: (1) Major contract wins; (2) Growing property investment income; (3) Strategic land banking exercise; (4) Listing of property division.
• Negatives: (1) Failure to secure new sizable projects; (2) Slower than expected take up rate for property launches.

Valuation

• Due to lower forecasted earnings, our Target Price has been reduced by 6% to RM2.41 from RM2.57 previously based on unchanged 14x average FY13-14 earnings.

Source: Hong Leong Investment Bank Research - 09 Apr 2013