WCT - job win prospects stay strong

Job win prospects stay strong

Misses by a yard. RM69m 1H10 net profit (-15% YoY) made up 41% of our full-year forecast and 46% of consensus. The main variance was net loss from associates and higher-than-expected taxes in 2Q10. We lower our 2010 net profit forecast by 10%, 2011-12 by 2% p.a. and target price to RM3.30, based on unchanged 14x 2011 earnings.
Maintain Buy. Job win prospects stay positive amidst the earnings blip.

Weaker overall. RM34m 2Q10 net profit (-20% YoY, -3% QoQ) included a RM10m investment revaluation gain for AEON mall at Klang. Associates turned in a small net loss due to resurfacing works at the  Swarna (India) toll concession. Effective tax rate was a high 31.7% due to the non-deductibility of “certain expenses”. Core operations however
delivered decent margins – 9.3% gross at construction and 29.9% at property development. Construction EBIT was flat QoQ, while property development EBIT rose 28% QoQ on higher progress billings.

Bakun is a wild card. 2Q10 results have not reflected further provision for the Bakun CW2 works. The press reported early this week on a likely RM490m provision by the Malaysia-China Hydro JV where WCT has an effective 7.7% stake. The JV is also said to be counter-claiming for more than RM420m. A worst case scenario is a RM38m provision by WCT, which works out to be 4.8sen per WCT share. 

Job win prospects intact. Outstanding construction order book stands at RM2.3b, we estimate, skewed towards domestic jobs (73%). We expect news-flow to pick up as WCT continues to vie for a role in the Klang Valley LRT extension works (where the tenders are closing these few weeks) and the new Sepang LCCT. It has also tendered for several
big-sized jobs in the Mid-East. In addition, WCT is still in the running for a major water infrastructure project in East Malaysia.

Lowering forecasts. The high tax rate in 2Q10 may be a one-off as the issue on deductibility of certain expenses is being pursued with the tax authorities. However, losses at the Swarna Toll are expected to run for a few more quarters, offsetting profit contributions from the other two Indian toll associates (Panagarh-Palsit, Durgapur). We lower our 2010 net profit forecast by 10%, and 2011-12 by 2% p.a..