Investment Highlights

• We maintain HOLD on WCT Holdings (WCT) with a higher fair value (FV) of RM0.46/share (vs RM0.42/share previously) based on a FY23F PE of 9x. This is in line with our benchmark for small-cap construction stocks. There is no FV adjustments for ESG based on our 3-star ESG rating.

• Following a briefing yesterday, we raise our earnings estimates by 11% for FY23F and 8% for FY24F to account for higher order book replenishment assumptions and improved outlook for the property investment segment.

• Outstanding construction order book slid 8% QoQ to RM3.5bil (1.3x of FY23F construction revenue) as at end-Dec 2022 as WCT did not secure jobs in FY22.

• Looking ahead, we raise our FY23F replenishment assumption from RM2bil to RM3bil, backed by a tender book of RM9bil. We are now more optimistic on WCT’s potential job wins, particularly the Subang Airport Regeneration Plan (SARP).

• WCT is exploring ways to participate in the SARP. They are currently in discussions with scant details available at this juncture. Recall in 2021, the cost for SARP is RM1.3bil. Nonetheless, we expect more clarity in 2QFY23.

• Other targeted projects are CMC301 of MRT3, flood mitigation projects, ECRL, Pan Borneo Sabah, Coastal Highway Sarawak and elevated structures in Kuching Urban Transportation System. WCT is also looking to expand overseas, notably Nusantara in Indonesia and Middle East.

• As for property development, WCT achieved sales of RM421mil in FY22, falling short of our RM500mil target (- 16%) and the group’s internal target of RM600mil (-30%).

• We estimate a conservative FY23F sales target of RM400mil, backed up balance inventories of RM368mil (- 22% YoY) and ongoing property projects, Adenia Apartment and Maple Residences. WCT is also looking to dispose 2 pieces of land in Bukit Tinggi, estimated at RM350mil.

• On property investment, footfalls at Paradigm Malls in Petaling Jaya and Johor Bahru are still below prepandemic levels. However, the average spending per person has surpassed 2019 levels. At Gateway@KLIA2, sales and footfall are rising, in line with the higher number of flights.

• Meanwhile, occupancy rate and average daily rental at Le Meridien (formerly known as New World Hotel, rebranded in Jun 2022) and Premiere Hotel are improving. We believe that the recovery will continue, spurred by the influx of Chinese tourists with China’s relaxed travel restrictions.

• Looking ahead, WCT’s challenges include (i) a weaker-than-expected recovery of job flows; (ii) eroding margins from higher-than-expected building material costs and labour shortages; and (iii) shelving of mega projects.

• WCT is currently trading at a fair FY23F PE of 8.3x, near our 9x benchmark for small-cap construction stocks.

Source: AmInvest Research - 1 Mar 2023