Investment Highlights

• We cut our FY18-20F forecasts by 16%, 7% and 12% respectively and reduce our FV by 25% to RM0.71 (from RM0.95) based on 8x revised FY19F FD EPS (from 10x previously) to reflect the continuing de-rating of construction stocks. Downgrade to UNDERWEIGHT from HOLD.

• Excluding one-off items (largely RM48mil profits from land sales in Serendah, as well from the LRT3 compulsory land acquisition), WCT's 9MFY18 core net profit of RM57.3mil missed expectations at only 59% of our full-year forecast and 52% of full-year consensus estimates. The variance against our forecast came largely from the lower-than-expected property development margins realized. We have reflected this in our forecasts.

• 9MFY18 core net profit fell 50% YoY as stronger rental incomes were offset by weaker property development profits and higher interest expense, while construction profits were relatively flat.

• YTD, WCT has secured two new jobs worth a total of RM2.3bil comprising: (1) Lendlease mall in Tun Razak Exchange (TRX) (RM555mil); and (2) Pavilion Damansara Heights (RM1.77bil). Meanwhile, its outstanding construction order book stands at RM7.2bil (Exhibit 2). Our forecasts assume construction job wins of RM2.5bil in FY18F, subsequently moderating to RM1.2bil annually in FY19-20F.

• We remain cautious on the outlook for the local construction sector. As the government scales back on public projects, local contractors will be competing for a shrinking pool of new jobs in the market. Severe undercutting among the players will result in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector. We believe WCT is mitigated by its substantial order backlog that should keep it busy over the next 2-3 years, coupled with its proven ability to compete under an open bidding system.

• Similarly, we are cautious on WCT’s other key businesses such as property development (due to the prolonged downturn in the local property market) and property investment (due to the oversupply of retail space in the market, coupled with e-commerce’s encroachment onto the brick-and-mortar shopping malls).

Source: AmInvest Research - 27 Nov 2018