Investment Highlights

• We keep relatively unchanged our forecasts and FV of RM0.54 based on 8x FY19F FD EPS, in line with our benchmark forward target P/E of 8x for small-cap construction stocks. Maintain our UNDERWEIGHT call.

• We liken WCT to an airplane in mid-air that is unable to gain velocity as the thrust that is propelling it forward (i.e. construction and property investment) is countered by the drag that is holding it back (i.e. property development and high gearing). The observations we gathered during the analyst briefing last Friday point to the same conclusion.

• Thrust 1 (construction): Sitting comfortably on an outstanding construction order book of RM6.4bil (Exhibit 1), WCT actually guided down its new job wins in FY19F to RM1bil (from RM1.5bil). WCT believes these new jobs will be “substantially” building jobs. It said that it is eyeing more superstructure works from Tun Razak Exchange (TRX) and Pavilion Damansara Heights (Phase 2) (PDH2). Recall, WCT in FY18 bagged the RM555mil Lendlease Mall building job in TRX and the RM1.77bil superstructure works for Pavilion Damansara Heights (Phase 1) (PDH1). WCT guided for the potential size of the superstructure works of PDH2 being about 60% of the size of PDH1’s and the award could come by end-2019 or in 2020, subject to PDH2 securing the funding approval. We cut our construction order book replenishment assumption to RM1bil annually (from RM1.2bil) in FY19–21F to bring ourselves in line with WCT’s revised guidance.

• Thrust 2 (property investment): We see a bright spot in WCT’s investment properties with recovering occupancy for Paradigm PJ (70%-owned), improving occupancy for Gateway@KLIA2 (70%-owned), Paradigm JB (whollyowned) and Subang Skypark (60%-owned), and a new long-term lease (with positive rental reversion) entered into with AEON (wholly-owned) (see Exhibit 2).

• Drag 1 (property development): We believe WCT’s property division is still far from out of the woods, with its unsold stock rising by another 10% to RM950mil (6.5x its FY18 sales of RM146mil) from RM865mil three months ago. WCT sets itself a sales target of RM200mil in FY19F. At present, its unbilled sales stand at RM118mil.

• Drag 2 (high gearing): As at 31 Dec 2018, WCT’s net debt and gearing stood at RM3.3bil and 1.02x respectively. It reiterated its de-gearing initiatives comprising a placement of new shares, the listing of its investment properties under a REIT and sales of unsold property stock and landbank.

• WCT acknowledged that the placement of new shares is not workable given the low share price and the weak market condition. It is hoping to raise up to RM400mil from the IPO of “WCT REIT” comprising Paradigm PJ, AEON Bukit Tinggi, New World Hotel (Kelana Jaya) (70%-owned), Premiere Hotel (Klang) (wholly-owned) and The Ascent (an EPF-owned office tower within the greater Paradigm PJ development). It said that it has, during the current quarter, embarked on property valuations and consultation with the authorities. It plans to make the IPO submission in 2Q and hopes to obtain the approval in 3Q. If these happen, the listing shall take place in 4Q. It also targets to raise up to RM350mil from the disposal of unsold property stock and landbank.

• Based on our estimates, the RM750mil proceeds from IPO of WCT REIT and sales of unsold property stock and landbank will reduce its net debt and gearing to RM2.5bil and 0.79x respectively, which are still considered stretched.

• For FY19–21F, we project construction and property investment to contribute 48–49% to group EBIT each, with the remaining 3% coming from property development.

• 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 - 4 Mar 2019