1QFY10 Results Review

WCT
Numbers Disappoint


WCT reported 1Q earnings of RM35m (-10.9% y-o-y, +7.4% q-o-q), which were made up only 20% of our full-year estimates. Management believes that job wins worth RM2bn are achievable this year. These include the Papar-Penampang dam, some IRWT packages and jobs from the Middle East. On the issue of cost overruns at Bakun, management said it is clarifying the numbers with Sime. We are cutting our FY10-11 earnings by 10%-16%. Downgrade to NEUTRAL, RM2.74 TP.

Below expectations. In WCT’s 1QFY10 results, revenue came in at RM400.1m (-58.7% y-o-y and -66.9% q-o-q) and earnings at RM35m (-10.9% y-o-y, +7.4% q-o-q). Margins showed healthy expansion, with EBIT margins at 15.1% vs 1.9% last quarter and 8.2% last year. We believe that the margin expansion could have been due to some of its newer domestic jobs (Medini infra and LCCT EW2) gaining traction. On an annualized basis, the numbers were below our expectations by 18.3% and consensus by 12.2%.

Jobs in the pipeline. Management has guided for an orderbook replenishment of RM2bn for FY10, of which RM238m has been achieved so far. The Letter of Intent for the >RM2bn Papar-Penampang Dam remains intact and works are still expected to commence sometime in 2H this year. On the Interstate Raw Water Transfer (IRWT), WCT has submitted its bid for the pipelines connecting the tunnel segment to the Langat 2. Tenders for this package have been closed as are now under evaluation. In the Middle East, WCT is initially expected to announce 2 contracts worth RM500m each. We gather that it has returned to the client to renegotiate a higher price as raw material prices have increased since. We understand that an award could be forthcoming soon.

Problems at Bakun.
Two weeks ago, Sime Darby (SELL, TP: RM7.02) reported that there were cost overruns at Bakun amounting to RM450m based on its 35.7% share. WCT and other members of the Malaysia-China Hydro (MCH) JV are in the midst of clarifying the numbers with Sime. WCT holds a 7.7% effective stake in MCH. Management maintains its view that provisions are unlikely to be made on its part.

Downgrade to NEUTRAL. Following the disappointing results, we have cut our FY10-11 earnings by 10%-16%. We will gather more details on WCT’s outlook following its analyst briefing to be held today. We are rolling over our earnings from FY10 to mid-CY11 at the same 14x earnings multiplier. Given the limited 6.6% upside to our TP, our rating has been cut from Buy to NEUTRAL with a RM2.74 TP.

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