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?