Investment Highlights

• We upgrade WCT to BUY from UNDERWEIGHT with a raised fair value of RM0.60/share (from RM0.54/share earlier) based on a higher 9x FY23F PE from 8x previously. This is in line with our benchmark forward PE of 9x for small-cap construction stocks. There are no adjustments for ESG based on our 3-star rating.

• WCT’s core net profit of RM52.1mil was above expectations, accounting for 40% of our forecasts and 47% of consensus estimates. The deviation came largely from better-than-expected contribution from property development segment. Nonetheless, we are maintaining our forecasts pending details from today’s briefing.

• After normalising one-offs in 1QFY21 (mainly reversal of accrual costs totaling RM49mil from the settlement of arbitration award in relation to the WCT-Meydan suit), WCT’s core net profit grew 91% YoY on stronger contribution from the construction segment and property investment segment as well as lower taxes.

• As the main revenue driver (48% of 1QFY22 revenue), the construction segment’s revenue grew 27% to RM292mil from RM231mil on the back of robust outstanding order book, previously at RM4.7bil (3.8x FY21 construction revenue). After adjusting for the WCT-Meydan suit, the segment’s earnings grew to RM15mil from RM9mil in tandem with improved revenue.

• Management previously guided replenishment of over RM1bil, which is line with our assumption of RM1.2bil for FY22–24F. Potential replenishments include sizeable infrastructural jobs locally (such as the Pan Borneo Highway or airport projects).

• We believe that WCT also stands a chance to benefit from the MRT3 project as it previously secured 2 packages worth RM1.1bil for the MRT2 in 2016 and 2017 as well as 3 packages worth RM1.5bil (prior to cost review) for the LRT3 in 2017.

• A close second to its construction segment (44% of 1QFY22 revenue), WCT’s property development segment grew significantly (+52%) mainly on the back of higher sale of vacant lands in the current quarter (1QFY22:RM214mill; 1QFY21:RM135mil), albeit at a lower profit (1QFY22:RM56mil; 1QFY21:RM76mil). Meanwhile, its property investment and management segment’s revenue grew 19% to RM44mil whereas its operating profit rose 22% to RM22mil following the resumption of economic activities after Covid-19 lockdowns.

• Challenges faced are: (i) rising building material costs led by an escalated or prolonged Ukraine-Russia war; and ii) delays or shelving of mega projects.

• We believe the stock is currently undervalued as it is trading at 8x FY23F PE which is lower than both our small-cap benchmark PE of 9x and average 4-year PE of 10x (Exhibit 3).

Source: AmInvest Research - 27 May 2022