Construction Weekly Review: 5th – 11th January 2009

• Construction sector ended mixed
The construction sector ended mixed last week as most counters tracked the gains in the broad market with the exception of WCT Bhd (WCT MK, not rated) which lost 28.7% of its market value. On notable filings, Employees Provident Fund increased its stakes in Gamuda and Muhibbah
Engineering with 4.91m and 0.59m shares added respectively.
• WCT lost Meydan Racecourse job in Dubai
News of WCT Bhd’s RM4.6bn Meydan Racecourse job in Dubai being terminated earlier last week not only caused a 30% limit down on WCT but also sent shock waves to the construction sector and investment fraternity. Due to alleged non-adherence to the agreed time schedule, WCT will not only lose RM1.29bn in remaining order book for the job but also RM178m performance and advance payment bonds called upon by its client. Although the circumstance under which the contract has been cancelled is now under dispute, WCT’s track record in the Middle East may be dented and this does not bode well for the company in securing new jobs in the region.
However, the said contract cancellation may not necessarily indicate that Middle Eastern jobs face heightened risk of cancellation as the disputes of the contract could very well be project specific. Among companies under coverage, IJM and Gamuda have the least exposure to the Middle East while Sunway Holdings and Muhibbah significant exposure exceeding 40% of their total order book.
Going forward, as construction order flow slows down in the Middle East, basic infrastructure jobs such as roads, bridges and airports which are commissioned by the Middle Eastern governments will be more sustainable than residential/commercial buildings or iconic developments by the private sector.
• Contracts awarded
New jobs worth RM689.6m were awarded last week.
• Maintain UNDERWEIGHT
While we maintain underweight on the construction sector, we still have buy calls on construction stocks under coverage as share prices have corrected significantly and very much at distressed levels. We are cautiously calling an underweight now in view of negative outlook in the near term due to order book replenishment risks.

Share price performance
The construction sector ended mixed last week as most counters tracked the gains in the broad market with the exception of WCT Bhd (WCT MK, not rated) which lost 28.7% of its market value.
On notable filings, Employees Provident Fund increased its stakes in Gamuda and Muhibbah Engineering with 4.91m and 0.59m shares added respectively.

WCT lost Meydan Racecourse job in Dubai
News of WCT Bhd’s RM4.6bn Meydan Racecourse job in Dubai being called off earlier last week not only caused a 30% limit down on WCT but also sent shock waves to the construction sector and investment fraternity.
The job for an iconic racecourse was awarded by the Meydan LLC to a 50:50 joint venture between WCT and Arabtec Construction LLC for a contract sum of AED4.6bn (RM4.6bn) with an original contractual completion date of 7 October 2009. Meydan attributed the cancellation of the contract to “non-adherence to the agreed time schedule for construction” which is strongly disputed by WCT and Arabtec. As of todate, 55% of the physical works has been completed. Besides share of the potential loss of order book amounting to AED1.35bn (RM1.29bn), WCT may also lose another RM178m on performance and advance payment bonds called on by Meydan.
The circumstance under which the contract has been cancelled is now under dispute and the parties concerned may resort to arbitration or litigation. Regardless of the outcome of the anticipated arbitration or litigation process, which is going to be a long drawn process, this event will dampen investor sentiments and cast more dark clouds over the construction sector. Furthermore, WCT’s track record in the Middle East may be dented and this does not bode well for the company in securing new jobs in the region.
However, the cancellation of WCT’s Meydan Racecourse contract may not necessarily indicate that Middle Eastern jobs face heightened risk of cancellation as the disputes of the contract could very well be project specific. However, we would like to highlight that the Middle East is not spared by the global economic slowdown and is therefore likely to see slower construction activities as the property sector in the region cools down.
Among companies under coverage, IJM and Gamuda have the least exposure to the Middle East while Sunway Holdings and Muhibbah significant exposure exceeding 40% of their total order book. Nevertheless, based on our conversation with management of construction companies under coverage, we noted that work progress of jobs in the Middle East is generally on schedule although extension of completion date is quite common. Collection of progress billings is generally on time except in Qatar where collection period is now 3 – 4 months as compared to 2 months previously.
As construction order flow slows down in the Middle East, basic infrastructure jobs such as roads, bridges and airports which are commissioned by the Middle Eastern governments will be more sustainable than residential/commercial buildings or iconic developments by the private sector.

Other notable construction news
– The Works Ministry has spent RM120m to implement infrastructure development projects listed under the RM7bn economic stimulus package announced by the government in November last year. Works Minister Datuk Ir Mohd Zain Mohamed said he had directed departments and agencies under his ministry to speed up the projects before March 31.
– Sunway Holdings Bhd and Goldman Sachs Strategic Investments (Asia) LLC have entered into a subscription agreement with Sunway Global Ltd that will be effected by capitalising the amount owing to the two companies by the latter. Under the agreement, Sunway Holdings and Goldman Sachs will subscribe for 78.69m and 57.62m share of HK$1 each in Sunway Global, a 60% subsidiary of Sunway Holdings. Sunway Holdings would also subscribe for 155.31m shares in Sunway Global for HK$155.31m (RM70.30m) cash. On completion of the exercise, it will hold 79.88% in Sunway Global while Goldman Sachs will hold 19.78%.

Contracts awarded
Jobs worth a combined RM689.6m were awarded during the week.