Investment Highlights

• We maintain HOLD on WCT Holdings (WCT) with an unchanged fair value (FV) of RM0.46/share. This is based on 9x FY23F PE, in line with our benchmark for small-cap construction stocks. There is no FV adjustments for ESG based on our 3-star rating.

• Following a briefing yesterday, we keep our earnings estimates unchanged. Below are the highlights:

• The construction segment’s outstanding order book slid 7% QoQ to RM4.1bil (2x FY22F construction revenue), while tenders submitted amounted to RM9bil (civil & infra: 56%; building: 44%).

• Despite the lack of replenishment thus far, we make no changes to our replenishment assumption of RM1.2bil as we expect job flows to recover in 2HFY22. WCT also indicated that it is bidding for CMC301 portion of the MRT3.

• WCT remains cautious on the outlook of construction costs in 2HFY22. WCT said that its labour force is almost at the optimal level as it is paying a premium to secure workers. On a positive note, most building material costs have stabilised.

• For the property development segment, WCT achieved sales of RM266mil, which made up 59% of our sales target of RM450mil. The balance stands at RM433mil. WCT also plans to launch Adenia Residensi in 3QFY22.

• Although management is guiding for an FY22F sales target of RM600mil, we remain conservative as home buying sentiment is still weak due to further potential OPR hikes in Malaysia.

• On its property investment segment, footfalls in bothParadigm Malls in Petaling Jaya and Johor Bahru have recovered close to pre-pandemic levels while average spending per person has surpassed pre-pandemic levels.

• As for Gateway@KLIA2 and Subang SkyPark, sales and footfalls are on an uptrend in tandem with more flights. However, these are still lagging compared to pre-pandemic levels. We continue to expect recovery in this segment as consumers return to physical storesand flights increase.

• Overall, challenges faced by WCT include: (i) weaker-thanexpected 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 - 2 Sept 2022