Investment Highlights

• We maintain HOLD on WCT Holdings (WCT) based on a lower fair value (FV) of RM0.39/share (vs RM0.43/share previously). Our fair value of RM0.39/share is based on a 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.

• We deem WCT’s 9MFY22 core net loss (CNL) of RM27mil to be below expectations vs. our original FY22F CNP of RM51mil and consensus estimate of RM54.3mil. The deviation came from lower than expected property earnings. As such, we slash our earnings estimates by 63% for FY22F, and 14% each for FY23F & FY24F.

• YoY, WCT’s CNL shrank 77% YoY to RM27mil in 9MFY22. One-offs in 9MFY22 included gains from the sale of Sungai Buaya land (RM56mil) and reversal of tax provision on a gain from the settlement of arbitration award in relation to the WCT-Meydan suit in the Middle East (RM63mil).

• Excluding the RM49mil reversal of accrued cost from the WCT-Meydan suit in 9MFY21, construction EBIT grew 52% to RM76mil in 9MFY22 from RM50mil in 9MFY21 as revenue improved by 17% to RM1.1bil and core EBIT margin rose 1.8%-point to 6.9%.

• WCT’s property development revenue (ex-land disposals) grew 36% to RM183mil in 9MFY22 from RM135mil in 9MFY21. However, the division recorded a loss of RM15mil in 9MFY22 compared to an EBIT of RM9mil in 9MFY21 as most of the properties were sold at lower prices.

• Property investment EBIT expanded 29% YoY to RM73mil in 9MFY22, in tandem with revenue growth of 19% YoY to RM139mil. This was attributed to increased post-pandemic footfalls at the shopping malls.

• Going forward, WCT’s challenges 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 slightly higher FY23F PE of 10x compared to 9x for our benchmark for small-cap construction stocks, with no prospective dividend yields.

Source: AmInvest Research - 30 Nov 2022