Investment Highlights

• We cut our FY19-20F net profit forecasts by 25% each, reduce our FV by 21% to RM0.52 (from RM0.66) and maintain our UNDERWEIGHT call. Our new FV is based on 8x FY19F FD EPS, in line with our benchmark forward target P/E of 8x for small-cap construction stocks.

• Excluding one-off items (a laundry list of land sales gains, investment property fair value gains, JV fair value loss, unrealised forex loss, and impairment of property stocks, undeveloped land parcels and an acquisition), WCT's FY18 core net profit of RM33.3mil missed our forecast and consensus estimates by a whopping 52% and 71% respectively. The variance against our forecast came from weak performance operationally (particularly, construction and property development) and financially (a negative operating cash flow, and hence increased interest cost).

• FY18 core net profit tumbled 42% YoY as stronger construction profits (from a low base in FY17 due to massive impairment of amount due from a project in Qatar) and rental incomes (thanks to the first full-year impact from Paradigm Mall in Johor Bahru), were offset by a collapse in property development profits and the more than doubling in interest expense.

• On a brighter note, FY18 was a bumper year for WCT in terms of construction job wins. It secured three large new jobs worth a total of RM2.7bil comprising: (1) Lendlease mall in Tun Razak Exchange (TRX) (RM555mil); (2) Pavilion Damansara Heights (RM1.77bil); and (3) KL118 mall (51% share worth RM345mil). Meanwhile, its outstanding construction order book stands at more than RM6bil. Our forecasts assume construction job wins to moderate to RM1.2bil annually in FY19–21F.

• We maintain our view that the current slowdown in the local construction industry sector is no ordinary sector cyclical downturn, but a secular change to the sector’s fundamentals, triggered by: (1) A major cutback in public infrastructure spending over the medium term as the government adheres to fiscal prudence; and (2) The permanent reduction in overall margins for players in the absence of high-margin directly-negotiated government jobs, as the government observes higher standards of transparency and accountability in public procurement.

• Similarly, we are cautious on WCT’s other key businesses such as property development (due to the stock overhang in the market and a tight lending policy by the banks) 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 - 1 Mar 2019