Maybank Investment Bank: Reiterates buy on WCT

Preferred construction pick

Reiterate buy. WCT is our preferred pick among the construction big caps. We see further upside in WCT’s share price given: (i) good order flow visibility (we believe WCT could exceed its RM2 billion target of new contracts), and (ii) scope for margin expansion following the near completion of legacy contracts. TP is pegged to 14x 2011 earnings.

We assume RM2 billion of job wins in 2010. WCT’s current order book (RM3.2 billion as at December 2009) is low by historical standards (peak backlog of RM7.3 billion worth of jobs). Potential awards include packages in the: (i) Klang Valley LRT extension, (ii) Pahang-Selangor water transfer (dam, piping, Langat 2), (iii) Sepang LCCT, (iv) water infrastructure in Sabah, and (v) infrastructure projects in the Middle East. We believe newsflow on potential awards could intensify in the next 12 months.

Benefiting from higher infrastructure spending in Qatar. Following the implementation of a fiscal stimulus program by the Qatari government in 2009, the aggregate value of contracts awarded by the Qatar Public Works Authority doubled in 2009. For 2010, some US$378 million (RM1.21 billion) worth of contracts have been awarded in 1Q2010 and about US$0.5 billion worth of projects are up for tender. We believe WCT, with its partner, are actively sourcing for projects in Qatar.

We retain our net profit forecast, projecting a 15% growth in 2010, supported by an outstanding order book of RM3.2 billion and margin restoration for Middle East jobs. For 2011, we project a 12% growth on higher contributions from property development, after maiden launches in 2010 at 1Medini (GDV: RM600 million), Paradigm (GDV: RM1.4 billion) and Vietnam’s Platinum (GDV: RM1b). There is upside to our forecasts on the final contract sum at ADF1 and Bakun.

Still attractive valuation. We believe WCT’s valuations are not yet stretched. Current share price implies a 2011 PER of 11.4x versus a peak of 37x. Its foreign shareholding, at 9% latest, has also retraced substantially from a recent peak of 28% as at end-2007/ early-2008.

Preferred pick among construction big caps

Further upside in share price, reiterate buy. In our view, WCT is poised for significant order flow replenishment due to: (i) increased infrastructure spending in the locations that WCT operates in (East & West Malaysia and Middle East), and (ii) WCT’s competitive tendering.

Coupled with margin expansion, we believe conditions are ripe for further appreciation of WCT’s share price in the next 12 months.

Internal win target could be surpassed. We continue to believe that WCT could surpass its target of RM2 billion of new contracts in 2010. We also assume RM2 billion of new awards annually, and see upside risk to our earnings forecasts if WCT’s new awards are “fast-turn” in nature.

Order flow replenishment the focus

Order book visibility into mid-2011. WCT’s order book stood at RM3.2 billion as at December 2009. With the completion of the sizable Abu Dhabi F1 (ADF1) contract, Middle East jobs now account for about 25% of WCT’s backlog. The New Doha International Airport (NDIA) contract, including additional works, is due for a hand-over by January 2011, while the Bahrain City Centre is due for completion by December 2010. On the domestic front, the LCCT earthworks has a January 2011 deadline, while the Medini infrastructure works completion deadline is July 2011.

Capable of taking on significantly more jobs. WCT’s current order book is low by the company’s standards. At its peak, WCT had about RM7.3 billion worth of backlog. We believe the group would be aggressively tendering for contracts in the coming months. The group’s low cost base with an extensive fleet of heavy equipment allows it to compete aggressively in tenders.

Focusing on Malaysia and Middle East. WCT’s potential tenders include packages in the: (i) Klang Valley LRT extension, (ii) Pahang-Selangor water transfer (dam, piping, and Langat 2), (iii) Sepang LCCT, (iv) water infrastructure in Sabah, and (v) infrastructure projects in the Middle East (Qatar, Bahrain and Abu Dhabi).

Spotlight on Qatar

One of WCT’s target markets. With WCT’s existing Middle Eastern jobs approaching completion, we believe management’s priority would be on securing new contracts in the region so as to utilise upcoming spare capacity. Qatar, being a resource-rich country that WCT has operated in, is a likely target market for the group in our view.

Implementation of fiscal stimulus. In an effort to mitigate the effects of the global financial crisis in 2009, the Qatari government budgeted to spend at largely the same levels as 2008 (when oil and gas prices were at record high). Infrastructure was the primary beneficiary, with infrastructure spending accounting for about 40% of the government’s budgeted expenditure.

Positive momentum on public awards. As a result of increased infrastructure spending, the aggregate value of contracts awarded by the Qatar Public Works Authority doubled in 2009. In 2010, the Public Works Authority maintained its momentum with regards to awards. Some US$378 million worth of contracts has been awarded in 1Q2010. The agency has also listed about US$0.5 billion worth of projects for tender.