WCT Holdings Bhd decade-long settlement over the Nad Al Sheba Dubai Racecourse dispute with Meydan Group LLC which entails ‘cash proceeds’ of AED726.6 mil (RM828.2 mil) could not be better timed.
To re-cap, the dispute dated back to January 2009 when WCT and its joint venture (JV) partner Arabtec Construction LLC revealed that that their JV contract has been terminated by Meydan on the grounds of a delay in the completion.
A truly positive surprise to construction group’s coffers, TA Securities Research views the compensation as not only viable to strengthen WCT’s capital position but also not discounting the possibility of WCT allocating part of the vast settlement sum for special dividend.
“Given that the balance sheet of WCT is expected to further strengthen following the cash received from the final settlement, we believe the group will now have a more solid financial strength to withstand the negative externalities amid the uncertainty during the COVID-19 pandemic,” opined analyst Chan Mun Chun in a company update.
All-in-all, TA Securities Research upgraded WCT to “buy” from “sell” while raising the company’s target price to 62.5 sen (from 44 sen previously) based on 0.25 times CY2022 price-to-book ratio (P/B).
However, Hong Leong Investment Bank (HLIB) Research is less sanguine about the so-called ‘windfall’.
“We see this as a much needed breathing space especially considering ongoing operational difficulties and upcoming sukuk (Islamic bond) redemptions,” justified analyst Edwin Woo. “By our estimates, net amount attributed to WCT is RM577.1 mil as RM251.1 mil will go towards repaying project subcontractors.”
In respect of this development, HLIB Research expects WCT to record a cumulative gain of circa RM200 mil to be recognised over three years in tandem with the schedule of payments.
“For illustration (disregarding timing of cash flows), net gearing (treating perpetual as debt) could fall from 110% as of 1Q 2021 to a more manageable 85%,” reckoned the research house.
“Nonetheless, we note that this is an optimistic estimate considering likely damage from EMCO (enhanced movement control order) and FMCO (full movement control order under Phase One).”
As a whole, HLIB Research retained its “hold” rating on WCT with an unchanged target price of 56 sen based on a 20% discount to sum-of-parts (SOP) value of 70 sen.
“Despite viewing this development positively, we maintain our cautious stance as scale of balance sheet impact from ongoing EMCO and FMCO remains uncertain,” the research house pointed out.
“The catalysts are sizable contract wins and further deleveraging from land and inventory sales while the downside risks are larger than expected adverse impact from EMCO and FMCO.”
At 9.35am, WCT was up 1.5 sen or 2.73% to 56.5 sen with 4.98 million shares traded, thus valuing the company at RM801 mil. – July 15, 2021
