ConstructionThe Gamuda Bhd-WCT Bhd joint venture (JV) has received the Arbitral Tribunal’s final award in the arbitration in Qatar with regards to the Dukhan Highway. The 51:49 JV lost the arbitration against Bahrain Asphalt Establishment BSC (BAE) and must pay: (i) 45.72 million Qatari riyals (RM38.24 million) (the original sum was 55.67 million riyals but 9.95 million riyals was given to the JV in respect of its counterclaim); and (ii) 17.10 million riyals as legal and other costs and US$412,000 (RM1.25 million) for arbitrators’ costs. The total damage borne by the JV, therefore, will be RM53.64 million — Gamuda: RM27.36 million and WCT: RM26.29 million.On Feb 21, 2006, BAE was appointed the subcontractor for the granular sub-base and flexible pavement works for the the Dukhan Highway, a project that involved the construction of a 43km new highway from Shahaniya to Zekreet in Qatar. The project was completed in August 2009. However, on March 4, 2010, BAE served a request for arbitration against the JV over certain disputes. BAE was claiming from the JV a total of 109.27 million Qatari riyals comprising: (i) 94.87 million riyals for alleged prolongation, escalation, collateral and associated costs for 728 days’ delay in completion of the subcontract works; (ii) 13.43 million riyals for alleged gabbro aggregate overcharge and wrongful deductions; (iii) 964,970 riyals for alleged wrongful deduction for supply of bitumen; and (iv) further unquantifiable sums for legal costs, arbitration costs and interest. Due to this outcome, we have trimmed our FY13 forecast by 4% for Gamuda and 10% for WCT and maintained 2014 financial year (FY14) forecasts for both companies as it is only a one-off payment. Nonetheless, the JV will further pursue its claims against the Qatar government in respect of the main contract. For now, we remain “neutral” on Gamuda with an unchanged target price (TP) of RM4.03 as our valuation is rolling to FY14. We downgrade WCT to “sell” with a new TP of RM2.10. Both are still on short-term risk adjusted methodology. This is the second arbitration for Gamuda after the first arbitration against Wayss & Freytag (M) Sdn Bhd in which the group had to pay RM91.93 million over the Stormwater Management and Road Tunnel (Smart) project. Although recent loss of its arbitrations may have negative implications for the group, we remain sanguine over its prospects moving forward. As for its latest mega projects (Ipoh-Padang Besar electrified double track project and KVMRT), we believe there is a minimal likelihood of another arbitration. 1MDB Bhd recently awarded WCT a contract for the earthworks, retaining walls and foundation for Phase 1 of infrastructure works for the Tun Razak Exchange (TRX). Though the contract value of RM169.3 million was disappointing, we expect there will be other packages from TRX. This latest contract brings WCT’s total order book in hand to RM3.4 billion. However, recent disappointments over the TRX contract value and the cancellation of the Batinah Expressway have negative implications for the group’s revenue. — BIMB Securities Research, April 22
This article first appeared in The Edge Financial Daily, on April 23, 2013.