WCT still haunted by racecourse ‘ghost’

WCT Holdings Bhd (March 13, RM1.80)

Maintain hold call with an unchanged target price (TP) of RM1.97: WCT Holdings Bhd has received a request for arbitration from the Dubai International Arbitration Centre which was filed by Triumpher Steel Construction Group (TSC). Under the arbitration request, TSC had named Arabtec as the first respondent and WCT as the second respondent. 

Arabtec and WCT had a 50:50 unincorporated joint venture (JV) which previously undertook the construction of the Nad Al Sheba Dubai Racecourse. TSC was the JV’s subcontractor in respect of certain steelwork for the job. In the arbitration request, TSC is claiming (UAE dirham) AED107.7 million (RM130.6 million) from the JV following the its subcontract termination in 2009.

Back in Sept 2007, the JV was appointed by Meydan LLC as the main contractor for the said racecourse project worth AED4.6 billion. In January 2009, Meydan terminated the JV as contractor on the grounds of work delays. Arbitration proceedings subsequently commenced between Meydan and the JV. Subsequently in July 2015, WCT won the arbitration proceedings and Meydan was required to pay the former a sum of AED1.15 billion. 

When the JV’s contract was terminated by Meydan, the former consequently terminated its subcontractors on the job. Back then, management guided that any payment on work of its subcontractors was contingent upon the JV first receiving payment from Meydan and this was also stipulated in the subcontract agreements. 

As we are not legal experts, we shall not attempt to predict the outcome of this recent arbitration request filled by TSC. However, should the arbitration outcome rule in favour of TSC, WCT can easily pay its 50% share of the claims amounting to AED53.9 million from its impending arbitration award owed by Meydan of AED1.15 billion.

Risks include an unfavourable outcome of the TSC arbitration, coupled with continued delays in WCT receiving payment from Meydan.

Should WCT be required to pay its 50% share of the claims to TSC amounting to AED53.9 million, our financial year 2017 earnings forecast would be reduced by 45% to RM80 million (from RM145 million currently). However, we would regard this as an exceptional item and hence leave our core earnings forecast unchanged.

We maintain our “hold” call on WCT with a TP of RM1.97. This recent development does not alter our view on WCT which needs to display better earnings consistency and reduce its gearing. — Hong Leong Investment Bank Research, March 13

This article first appeared in The Edge Financial Daily, on March 14, 2017.

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