Investment Highlights

• We downgrade WCT Holdings (WCT) to HOLD from BUY given the limited upside of 7% to our lowered fair value (FV) of RM0.46/share (vs. RM0.58/share previously). This is based on 9x FY23F PE, in line with our benchmark for smallcap construction stocks. There is no FV adjustment for ESG based on our 3-star ESG rating.

• We slash our earnings estimates by 33% in FY22F, 21% in FY23F, and 10% in FY24F to account for higher-thanexpected construction cost for ongoing projects.

• WCT’s 1HFY22 core net loss (CNL) of RM34mil was worse than our earlier FY22F net profit of RM77mil and consensus’ RM64mil. The deviation from our forecast stemmed from weaker-than-expected contribution from the engineering and construction segment.

• WCT posted a smaller CNL of RM34mil in 1HFY22 compared to a CNL of RM44mil in 1HFY21. One-offs in 1HFY22 consisted of a RM56mil gain from the sale of Sungai Buaya land and a RM63mil reversal of tax provision on a gain from the settlement of an arbitration award in relation to the WCT-Meydan suit in the Middle East.

• The construction segment’s 1HFY22 revenue grew 32% YoY to RM750mil on the back of a strong outstanding order book.

• Excluding the RM49mil reversal of accrued cost from the WCT-Meydan suit in 1HFY21, construction EBIT fell by 8% to RM30mil in 1HFY22 from RM32mil in 1HFY21. This was due to higher construction cost for ongoing projects.

• WCT’s 1HFY22 property development revenue rose 13% YoY to RM110mil (ex-land disposals) from RM98mil in 1HFY21. However, EBIT swung to a loss of RM12mil in 1HFY22 vs. a positive RM16mil in 1HFY21 as most sales were from inventories with low margin.

• The property investment EBIT expanded 30% YoY to RM49mil in 1HFY22 in line with its revenue growth of 20%. This stems from improving footfalls at the shopping malls in 1HFY22 after being affected by the Covid-19 lockdown last year.

• Challenges faced by WCT include: (i) weaker-than-expected recovery of job flows; (ii) eroding profit margins from rising building material costs and labour shortages; and (iii) delays/cost revisions of mega projects.

• WCT is currently trading at a fair 8.5x FY23F PE, near our benchmark of 9x for small-cap construction stocks.

Source: AmInvest Research - 1 Sept 2022