Investment Highlights

• We maintain HOLD on WCT Holdings (WCT) with a higher fair value (FV) of RM0.42/share (vs RM0.39/share previously), based on 9x FY23F PE that is 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 cut our earnings by 55% for FY22F but raise 6% for FY23F and 9% for FY24F on deferred order book replenishment assumptions.

• Key takeaways are as follows:-
  • In 3QFY22, construction segment registered an impressive EBIT margin of 13% due to project variation orders. Hence, we think that the margins will normalise to 6% in the coming quarters.
  • Outstanding construction order book slid 7% QoQ to RM3.8bil (2x of FY23F construction revenue) due to lack of replenishment. As such, we reduce our replenishment assumption FY22F to nil from RM1.2bil but raise FY23F to RM2.0bil from RM1.2bil. This is due to near-term uncertainties post-GE15 and potential recovery of job flows in FY23F, supported by WCT’s tender book of RM9bil (civil & infra: 56%; building: 44%).
  • Some of the projects tendered were CMC301 of Mass Rapid Transit 3, flood mitigation projects, hospital projects and building projects in Klang Valley.
  • As for property development, WCT achieved sales of RM382mil, making up 85% of our earlier FY22F sales target of RM450mil, which has been raised to RM500mil currently. This is supported by a balance inventory of RM365mil (-15% QoQ) and launch of Adenia apartments which has an estimated GDV of RM68mil in Aug 2022. The project has achieved a decent sales take-up of 61% to date.
  • Management is guiding for a FY22F sales target of RM600mil. However, we remain conservative as we think that home buying sentiments are weak due to another potential OPR hike in Malaysia.
• Going forward, WCT’s challenges include: (i) weaker-thanexpected recovery of job flows; (ii) eroding profit margins from rising building material cost and labour shortages; and (iii) delays/cost revisions of mega projects.

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

Source: AmInvest Research - 1 Dec 2022