WCT - Re-entering a sweet spot era

We lift our target price to RM3.00 after raising 2009-11 net profit forecasts by 24-33%. Yesterday’s results briefing revealed significant variation order claims and better- than-expected orderbook replenishment prospects.

Raise job win target to RM1.5b ... Contract wins should touch the RM1.5b mark in 2009 on new contract jobs at home and overseas, which include the potential conversion of two Letter of Intent (LOI) jobs in Sabah worth RM500m into Letter of Award (LOA) contracts by year-end. Should the latter materialise, WCT’s orderbook will increase to RM3.3b from RM2.8b currently.

... exceeding 2009’s RM1b orderbook target. To-date, WCT has bagged some RM1.3b of new jobs - RM766m Medini infrastructure works in Iskandar and two additional works in their existing projects in the Middle East - RM250m Abu Dhabi F1 project and RM370m New Doha International Airport (NDIA).

Orderbook replenishment looks promising in 2010. A potential third LOI (estimated RM1b-1.5b) for an infrastructure job in Sabah could boost earnings growth in 2010-11. Besides this, the Group is also scouring for other mega projects such as an extension of two LRT lines worth RM7b-10b, further jobs in Medini, Iskandar, after the recent surprise win of ajob as well as overseas jobs in Oman and Abu Dhabi.

Overseas prospects brightening. The company assessed that the construction cycle in the Middle East has troughed. For example, the Yas Island project in UAE still requires some infrastructure works to improve road accessibility, and WCT could secure more jobs there.

Raise margin expectations; significant variation orders secured. We raise our 2009-11 EBITDA margins from 6% to 10%, to factor in recently secured variation orders at the NDIA. We estimate 30% of the RM370m job extension reflects a settlement of variation order claims. Since the RM3.2b NDIA project (80% completed to-date) has yet to recognise much profit as costs associated to the extra variation orders were frontloaded, we expect this project’s estimated net profit of RM80m (based on 5% margin) to be reflected at the project’s mid- to tail-end, thus benefitting 2010-11 earnings.

We upgrade our net profit forecasts for 2009-2011 by 24-33%, factoring in higher orderbook replenishment of RM1.5b (previously RM1b), variation orders and higher margins at NDIA.