WCT: Two Extremely Contrasting Views

During Invest Malaysia 2009, WCT had a presentation which attracted a lot of people.

I got hold of CIMB Research report dated 2nd July 2009 on WCT.

The opening line.

• Notes from Invest Malaysia 2009
  WCT’s presentation at the Invest Malaysia conference yesterday attracted more than 100 fund managers and buy-side analysts. The presentation was made by ED Loh Siew Choh who gave a thorough rundown of the group’s operations and outlook.

Oh... only buy-side analysts?

I chuckled. How come no sell-side analysts?

Anyway. as it is, WCT was trading around 2.10. CIMB's target price was a rather very optimistic price of 3.65!

I was shocked because I had read that RHB had WCT as underperform with a fair value of only 1.10.

So the sell-side analyst had WCT at 1.10, while the buy-side had it at 3.65!!!

I was bemused by the contrasting difference between them, while acknowledging the fact that opinions do differ in the share market.

Anyway, let's look at the chains from May 2009.

WCT reported its earnings on 21 May 2009. It was disappointing.

Quarterly rpt on consolidated results for the financial period ended 31/3/2009

RHB was disappointed with the earnings. WCT reported earnings of 39.2 million. Last year same quarter it was some 55.5 million. And RHB felt that earnings could be weak in the coming quarters and was worried about the depleting orderbook.

• 1QFY12/09 net profit came in at 26-29% of our full-year forecast and the full-year market consensus. However, we consider the results within expectations as we expect slightly weaker quarters ahead on depleting construction orderbook. There was no additional adjustment made during the quarter with regards to the terminated Meydan Racecourse project.

And here are risks and how RHB valued WCT.

• Risks. The risks include: (1) New contracts secured in FY12/09-10 coming in below our target of RM1bn per annum; and (2) Potentially more provisions from the troubled Meydan Racecourse contract.
• Negative outlook. We find it difficult to turn positive on the construction sector over the short term as: (1) Small projects will dominate the list of public projects to be implemented locally; and (2) The flow of private sector jobs will remain weak in the absence of funding or reasonably priced funding on the back of the global credit crunch.
• Maintain Underperform. Indicative fair value is RM1.31 based on 7x fully-diluted FY12/10 EPS of 18.6sen (see Table 5), at a discount to our benchmark 1-year forward target PER of 8-10x for the construction sector to reflect WCT’s higher earnings risks arising from potentially

A few days later on the 25th May, RHB downgraded WCT further! RHB gave it a massive underperform rating with a fair value of only 1.10.

And this is despite WCT's conference call where WCT talked about the potential in Sabah where it could get 'a couple of billion ringgit' of LOI

• Sabah LOI worth “a couple of billion ringgit”? WCT hinted that the potential infrastructure jobs in Sabah of which it has received Letters of Intent (LOI) early this year may be worth “a couple of billion ringgit”. Assuming that the projects are to get off the ground, WCT’s share of work may amount to at least RM1bn. WCT is confident that the formal awards of the contracts could happen within the next six months, or as early as Sep 09. WCT remained tight-lipped as to the job scope. However, during our private meeting with WCT earlier, it did hint that the jobs are meant to address basic infrastructure that is still lacking in the state, particularly, “road network and water supply”. On the overseas front, WCT expects “substantial” additional work at New Doha International Airport (NDIA) in Qatar largely due to design changes. It maintained its new orderbook guidance of RM1bn in FY12/09 that is consistent with our assumption.

RHB then gave its reasons against bigger construction players.

• Sector’s fundamentals remain weak. Large construction players including WCT of which modus operandi, setup as well as economics are suited more to doing larger projects, are likely to get little out of the two recently announced stimulus packages. This is because the key focus of the stimulus packages is largely on small projects that are easy to roll out such as schools, hospital, quarters, low-cost housing, roads and bridges that will benefit mainly small contractors.

And lastly here's RHB reasoning.

• Negative outlook. We find it difficult to turn positive on the construction sector over the short term as: (1) Small projects will dominate the list of public projects to be implemented locally; and (2) The flow of private sector jobs will remain weak in the absence of funding or reasonably priced funding on the back of the global credit crunch.
• Maintain Underperform. Indicative fair value is cut by 16% from RM1.31 to RM1.10 based on 7x revised fully-diluted FY12/10 EPS of 15.8sen, at a discount to our benchmark 1-year forward target PER of 8-10x for the construction sector to reflect WCT’s higher earnings risks arising from potentially more provisions from the troubled Meydan Racecourse contract.

Now CIMB.

On 22 May 2009.

CIMB's valuation.

• Maintain TRADING BUY. Our forecasts are unchanged, as is our RNAV-based target price of RM2.60 which we continue to peg to a 40% discount to RNAV. We continue to premise our TRADING BUY call on the potential re-rating catalysts of (i) a revival of newsflow on contracts over the coming months and (ii) investors’ renewed appetite for higher-beta stocks. Its sustainable dividend yield of almost 5% is the highest in our construction universe. CY09-10 P/Es of around 9x are still among the lowest in our coverage.

CIMB used a RNAV valaution. Ah.

a 40% discount to RNAV.

Do note that CIMB did not talk about WCT's current issue between WCT and Arabtec.

A couple of days later, CIMB had the following.

CIMB's Comments and valuations.

• Comments
  Positive revelations. We were positively surprised by the value of the potential new contract in Sabah, indications for which have more than doubled from an estimated RM500m to RM1bn-2bn (see our 5 May 09 update). We estimate that WCT stands a good chance of scoring five potential new jobs worth at least RM3bn (Figure 2). An immediate boost to the order book would come from the Sabah project.
  LRT upgrade/extension. As for the LRT upgrade/extension, indications from WCT tie in with our recent findings. Our industry checks reveal that selected tenders for the project will be called as early as Jul 09 and preliminary works could start in 4Q09. The scope of works will cover four extension tracks involving two ends each for the Star LRT line and Putra LRT line. The total distance will be 40-50km, which translates roughly into RM110m construction cost per km. The project will be on a selected open tender basis which is likely to involve four contractors for each extension and one key subcontractor. Conservatively, assuming the RM7bn worth of works is split equally among four contractors, WCT’s potential share works out to be RM1.8bn. If WCT participates as a key subcontractor and assuming that 20% of RM7bn is subcontracted, its potential share of works is RM1.4bn. Indications are that the LRT extension/upgrade will span three years.
• Valuation and recommendation
  TRADING BUY reafirmed. We left the briefing feeling more optimistic about WCT’s odds of emerging a key winner of government pump priming as it has a strong chance of bagging a local infrastructure job worth RM1bn-2bn in the coming months. For now, we leave our forecasts unchanged but stress that there is upside to our assumption of RM1.5bn of new contracts over the next two years. We roughly estimate that every RM500m increase in contracts at a pretax margin of 15% and a 2-year profit recognition would raise our RNAV estimate by 25sen
  Our RNAV-based target price is kept at RM2.60, which we continue to peg to a 40% discount to RNAV. Our TRADING BUY call is premised on the potential re-rating catalysts of (i) a revival of newsflow on contracts over the coming months and (ii) investors’ renewed appetite for higher-beta stocks. Its CY09-10 P/Es of around 10x are still among the lowest in our coverage.

Note RNAV computation is the same. Hence I am not highlighting again. It's still a buy with a target price of 2.60 based on 40% discount to RNAV.

Then came Invest Malaysia. Now here are the notes from CIMB.

Comments
Prospects continue to be bright. There were no major surprises from the presentation apart from the revelation that WCT is in talks on a new highway job in Qatar. We had expected potential new jobs in the Gulf states to come from Yas Island. Locally, WCT’s optimism over increased pump-priming in 2H09 ties in with our bullish view on the construction sector as laid out in our 1 July 09 sector note. Expectations are high that the RM7bn-10bn LRT upgrade/extension in the Klang Valley will be the first mega project to kick-start pump-priming, followed by several fast-track jobs outlined under the stimulus packages and 9MP. WCT is expecting an LOA for an infrastructure job in Sabah. We think that the award will come soon as the project is among the priority jobs to be fast-tracked

Valuation and recommendation
Maintain OUTPERFORM and RM3.65 target price. Our forecasts are unchanged, as is our RNAV-based target price of RM3.65, pegged to an unchanged 20% discount to RNAV. The stock is one of our top picks in the construction sector. Order book visibility is intact, underpinned by the rollout of major projects in 2H09 and potential new jobs from the Gulf region. WCT has an outstanding order book of RM2.2bn. A favourable decision on the outstanding Meydan arbitration would be a positive surprise and is a potential re-rating catalyst, along with (i) the award of an infrastructure contract in Sabah, (ii) potential new jobs in the Middle East, and (ii) intensified pump-priming newsflow in 2H09.

WOW!

RNAV-based target price is now at 3.65.

Now I do not like the way they write pegged to an unchanged 20% discount to RNAV.

Why?

Because RNAV is now changed. RNAV is adjusted higher and the discount used is 20% compared to 40%!

Here's the table.

See how RNAV has increased to 4.168 billion compared to 3.944 billion?

See how discount used is only 20%?

The sell-side see WCT at 1.10 while the buy-side see WCT at 3.65.

So how now my dearest? One see 1.10. Other see 3.65. What do you see in this deep blue sea?

What's Said About WCT

From CIMB.



From RHB

Meydan Statement On Why It Cancelled WCT's Contract

Posted on Dow Jones news.

• Dubai Meydan: Arabtec, WCT Contract Canceled On Delays
  
  DUBAI (Zawya Dow Jones)--Dubai-based Meydan L.L.C. said Tuesday it canceled a $1.3 billion contract with Malaysia's WCT Bhd. (9679.KU) and local firm Arabtec Construction L.L.C. because the firms failed to stick to the time schedule for the construction of the Nad Al-Sheba Racecourse Project in the emirate.
  
  "The phases of the completion of the main stand and the infrastructure works for the horse racing course at Nad Al Sheba which had been awarded to Arabtec and WCT of Malaysia has shown considerable delay in implementation," a Meydan official said in an emailed statement to Zawya Dow Jones.
  
  Meydan said it took the decision to "reassert its resolve to complete the project on time in order to honor its international and local commitments."
  
  The developer said other contractors will continue working on the mega-project "so as to inaugurate the project on the targeted schedule."
  
  The WCT-Arabtec joint-venture was awarded the build-only contract by Meydan to construct and complete the main building works, external works and infrastructure works of the racecourse on Sept. 18, 2007. The contractual completion was scheduled for Oct. 7, 2009.
  
  To date, the joint venture has completed about 55% of the physical portion of the works, with the remaining 40% to be undertaken by nominated subcontractors and the 5% directly by the joint venture.
  
  WCT shares fell 29.5% to MYR1.29 Tuesday in active trade in reaction to the news before being suspended at the company's request. Arabtec shares closed down 9.7% at AED2.34 on the Dubai Financial Market.
  
  In a filing to the Kuala Lumpur stock exchange, WCT said it stands to potentially lose 1.35 billion U.A.E. dirhams ($367.5 million) in its order book from the cancellation of the project and that "the terms and conditions of the cancellation is currently being pursued."
  
  "The Board views the cancellation as a breach of contract (on the part of Meydan)," WCT said, adding the company, through the joint-venture, is currently considering all its options and will take the necessary steps to protect the group's interests.
  
  Arabtec officials weren't immediately available to comment when called by Zawya Dow Jones.
  
  The 67 million square feet Meydan development is scheduled to open in 2010 in time for the 15th Dubai World Cup, the richest horse race in the world.
  

More On WCT's Racecourse Project Termination

Posted early this morning: Dubai's Meydan Terminates Racecourse Construstion Deal With WCT!

And it did not shocked me when WCT slumps 29.5% after Dubai contract cancelled.

Let's trace back in time. The following article was posted on the Edge back in 2007.

• 19-09-2007: WCT’s RM4.6b Dubai projectto boost earnings
  by Lee Yu Tang
  
  KUALA LUMPUR: WCT Engineering Bhd and its Dubai-based partner have clinched a RM4.6 billion contract to build the proposed Nad Al Sheba racecourse in Dubai, the United Arab Emirates (UAE).
  
  The joint venture Arabtec Construction LLC-WCT Engineering JV was awarded the build-only contract for the main building, external works and infrastructure for the racecourse. It was designed by Malaysian architect Teo Ah Khing.
  
  “The construction period is approximately 25 months with immediate commencement,” it said yesterday.
  
  Arabtec Construction LLC-WCT Engineering JV is an unincorporated joint venture (JV) between WCT and Arabtec Construction LLC -- a unit of Arabtec Holding PJSC. The rights and liabilities of WCT and Arabtec in the JV are on a 50:50 ratio.
  
  The one-km long grandstand building would have a capacity of 55,000 to 60,000, a five-star-plus luxury hotel, more than 10 restaurants, museum and gallery, covered car park for more than 10,000.
  
  HwangDBS Vickers Research said WCT’s 50% share of the project would boost its order book by 54% to RM6.58 billion. It raised the FY08 – FY09 net profit forecast by 12% and 9% respectively to RM161.1 million and RM190.7 million.
  “Our earnings projection is conservative and factors in construction margin of 6%. As such, there is room for further increases in our forecast on higher than expected construction margins. Every 1% increase in margins increases our FY08 net profit by 4%,” said.
  
  He said in the middle term, there could be the possibility of additional work on the group’s existing profile of mega jobs in the Middle East such as the Dubai World Central International Airport, New Doha International Airport.
  
  WCT and Arabtec, had in March, constructed the world’s tallest building Burj Dubai. It had also secured RM486 million worth of works for the Dubai World Central International Airport drainage and sewerage system.
  
  Aseambankers Equity Research said WCT’s share of the racecourse project would raise WCT’s outstanding construction order book to around RM7 billion from RM4.5 billion.
  
  It said the project reaffirmed WCT’s position in Middle-Eastern construction and provided strong earnings growth in 2008 and earnings visibility into 2009. “Net margins for this project could potentially be 8% to 10%,” it said.
  
  WCT’s share price, closed 65 sen higher at RM7.25 yesterday, highest ever since July 2005. There were 2.11 million shares done.

Source: http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_1bea0198-cb73c03a-35eed000-1971f5c0

Earnings forecasts had been raised because of this projects.

Earnings visibility had been established for this company.

And now this project is terminated.

I do have a copy of a RHB report on WCT and the impacts on its earnings from this project back in 2007. Here is a screen shot.

Dubai's Meydan Terminates Racecourse Construstion Deal With WCT!

Posted on Business Times:

• Dubai axes racecourse deal with WCT Engr
  
  Published: 2009/01/06
  
  DUBAI: Dubai’s Meydan LLC said yesterday it has cancelled a racecourse construction deal with Malaysian construction firm WCT Engineering Bhd and local firm Arabtec.
  
  A Meydan statement did not give a value for the deal, but WCT said in 2007 that its 50-50 joint venture with Arabtec had won a US$1.3 billion contract to build the racecourse in Dubai.
  
  The contract was cancelled “because of non-adherence to the agreed time schedule for construction,” Meydan said in the statement.
  
  Arabtec officials could not be reached for comment.
  
  Meydan is taking steps to commission other companies to complete the racecourse by 2010, when it is to be opened with the Dubai World Cup horse race, the statement said.
  
  The racecourse is designed to include a 1 km (0.6 mile) grandstand and capacity for up to 60,000 spectators.
  
  Because of the global financial crisis and falling construction costs, Gulf Arab countries have cut back on some large projects or tried to renegotiate costs with contractors. - Reuters

Source: here

Bad news for WCT Engineering!

Would we see more termination of contracts from Gulf Arab countries?

Judging from the drastic decline in the crude and the impact on their stock markets (see the following blog posting last year: Crisis Hit Arab Nations, Sending Stocks Into Tailspin ) and the current global financial crisis, I would not discount this from happening again!

Regarding WCT Land again.

Previous posting on WCT Land can be found here

Just received a comment made by Annon to John. And since the original posting is buried deep in the blog, I thought I reproduce the blog posting and all its replies again.

==>>

• Would be very much appreciate if you could share your opinions, good or bad, on WCTLAND.

WCT Land is the property arm of WCT Enginerring. It was listed at end 2004 via the reverse takeover of Bescorp Industries.

And under part of the takeover exercise, some loan stocks were issued. ( see this announcement ).

The issue to note is the straight conversion (no cash involved) of 1 loan stock into 2 new ordinary shares upon expiry (do note, there's an option to convert early but the condition isn't as attractive. These loan stocks has a 5-year maturity and expires in 2009. Currently there are 120 million loan stock shares and 321.900 million ordinary shares of WCT Land. And depending on your personal investing strategy, do not discount the dilution effects caused by the loan stocks. Meaning to say, if you are a shorter term investor, then this issue is not going to effect you that much but if you believe that WCT Land has a great prospect in the future and plan to buy and hold for a couple of years, then you should be aware that your earnings could be drastically diluted when these loan stocks are converted into ordinary share.

WCT Land's main development project and its main forte is the BBT project (Bandar Bukit Tinggi) in Klang. The size of this project stated back in 2004 was around 534 ha. As you know, the Bandar Bukit Tinggi is in the Southern Klang region and is now known as the commercial hub of Klang. And for some investors, some might be concerned over this factor, for they view a developer with just one main project as risky and also they might be a bit biased over its future prospect. And perhaps this could be one of the reasons why the performance of the stock is rather lacklusture since its listing.

Which is why the need for this developer to expand beyond BBT. And recently there was an article in the Edge Daily titled: WCT Land's RM196m project in Kota Kinabalu.

This stock is extensively covered by both Affin Securities and Standard and Poors and can be viewed at Bursa eResearch website.

Moola,

Thanks for your sharing.

I have few questions regards WCTL 2005 financial report vs 2004. Hope you can help.

No doubt WCTL had posted a good result in PBT & PAT. But I have few quesries regards it's Balance Sheet & Cash Flow.

1. Cash is increased from 172mil to 206mil (+34mil), but it has new drawdown of term loan 72mil. Is this healthy?

2. I am doubt with it's Cash Flow especially on "Change in working capital" segment. Why suddenly all criterias in this segment increase so much compared to 2004? Anything goes wrong?

3. In overall of it's cash flow, WCTL actually shows negetive flow in 2005, if he did not drawdown it's new term loan of 72mil. Am I right?

Cheers. posted by John : 2:45 PM

Hi John,

I am not too sure since I really do not follow this stock at all. Anyway gimme sometime to check on it.

Cheers!

posted by Moola : 2:48 PM

John,

Gnerally, when the cash is increased because of a loan, one has to be prudent to see where the money is going into. For WCT land, you just have to check and see the reason for the loan and where WCT Land is spending the loan. Is the loan used as capital expenditure in new development projects? Has bought any new land? Has entered into any jv? etc, etc.

On the 'working capital' thingy. Sorry me not accountant. So I am not too sure what is happening here.

How do I rate its cash flow right now? Hard to say and definately too early to pass judgement. As it is, WCT Land is one township champion. Hence, it is utmost important that it ventures into new areas, new projects. Hence, there could be some justifications here.

ok?

posted by Moola : 3:31 PM

Hi Moola,

Thanks for your view. Ya, now I have better picture about WCTL spending...

Cheers.

posted by John : 9:58 AM

====>>>>

Hi John,

To answer some of your questions on WCT Land's Cash Flow;-

1. Most property development companies may sometimes face timing recognition on their billings to customers and billings from suppliers. Hence, that may explain the high working cap.

2. For property developers in Malaysia, majority of the cash is locked under Housing Development Act (HDA), whereby no other usage is allowed except for payments for expenses related to building costs on sold residential property. Commercial properties are not subject to HDA.

3. From its 2005 Annual Report, it mentioned that they acquired two pieces of development land in Kelana Jaya and Kota Kinabalu for major commercial and high-end residential properties respectively. Hence, the cash outflow. Also, WCT Land starts to venture out of Klang and into other types of development, which I personally view as a positive move.

4. Recently, if you catch the story, Jusco has signed up a 25 Years Lease with subsi of WCT Land to manage the AEON Bukit Tinggi Shopping Centre, the largest in Malaysia. I wonder if that of Klang gonna be another Bandar Utama.

5. One downside or upside (depends on how you perceive the stock) of WCT Land's share price is that it is trading within its NTA but 40% less its IPO price. Perhaps, as the old saying is that property counters in Malaysia tend to be slower compared to other sector.

Hope these helps.

posted by Anonymous : 1:47 PM Oct 28th 2006.

==========================================================

Many thanks to Anon for your comments.

Moolah