WCT Bhd (Mar 17, RM2.95)
Maintain outperform at RM2.99 with target price of RM4.15: Bahrain has declared a three-month state of emergency following the unrest that began two months ago. This is a negative surprise to us. The king of Bahrain has authorised the army head to guarantee security as a second contingent of GCC troops arrived after two months of anti-government protests.
According to various news wires, security forces rolled across the centre of town, taking it from the protesters who had moved in a month ago and set ablaze the demonstrators' tented encampment. Upon checking with WCT's management, we gathered that tension in Bahrain has escalated but the protests are much more intense near the bridge connecting Saudi Arabia and Bahrain.
The protests are not in the vicinity of the soon-to-be-completed BCC project where only interior fit-out works are outstanding. WCT is left with three staff on site who are monitoring the completion of the project.
The outstanding works amount to RM37 million, which will contribute about RM2.5 million to the bottom line. The scope of works also involves testing and commissioning of the entire complex.
Management has pre-planned an evacuation/contingency move should the situation worsen but does not think that it will, at least as far as the impact on its job is concerned. The group has contingency funds for this in the form of the 10% advance payment received at the onset of the project. If there is need to evacuate, it should be swift as the major machinery used during the construction of BCC had been moved elsewhere at end-2009.
In the Gulf region, WCT has three jobs outstanding with the total balance of works being RM1.6 billion, the bulk of which is located in Qatar. The only project outstanding in Bahrain is the BCC interior fit-out works.
Total outstanding jobs in Qatar and Bahrain make up 42% of WCT's total outstanding order book of RM3.7 billion. Although in terms of exposure, WCT's Middle East exposure exceeds that of Muhibbah Engineering (M) Bhd, IJM Corp and Gamuda Bhd, management still holds the view that the likelihood of a spillover of the social/political unrest to Qatar and other Gulf countries is remote at this juncture as the political and social circumstances in those countries are different. In the worst case, it would need to make a provision equivalent to less than 2% of FY11 net profit and less than 1% of realisable net asset value (RNAV) for the Bahrain project.
Although the state of emergency declared by Bahrain is a negative surprise, we draw comfort from management's assurance that it is unlikely to derail the progress of the BCC fit-out works. Furthermore, Bahrain makes up only 1% of WCT's outstanding order book.
We make no changes to our forecasts, “outperform” call or RM4.15 target price, which we continue to base on a 10% discount to RNAV. WCT's share price has shed 21 sen (17%) since the start of the year, largely because of the developments in the Middle East. An easing of the tension in the Middle East could spark a share price recovery, along with success in clinching new contracts.
WCT remains one of our top picks in the construction sector. Share price weakness is a buying opportunity. — CIMB Research, Mar 17
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