We maintain HOLD on WCT Holdings (WCT) with a lower fair value (FV) of RM0.42/share (vs RM0.46/share previously) 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 ESG rating.
We deem WCT’s 1QFY23 core net loss (CNL) of RM6mil as below expectations compared to our FY23F net profit of RM73mil and consensus’ RM76mil. The deviation is due to slower-than-expected progress billing of its construction projects. As such, we reduce FY23F-24F earnings by 9%.
WCT’s CNL narrowed 75% YoY to RM6mil in 1QFY23 as higher EBIT contribution from the property investment segment (+93% YoY) was more than offset by lower construction EBIT (-39% YoY).
The property development segment swung into the black with an EBIT of RM6mil in 1QFY23 vs. a LBIT of RM1mil in 1QFY22. Recall that in 1QFY22, the division’s results included a RM56mil one-off gain from sale of the Sungai Buaya land.
On a sequential basis, WCT swung into the red in 1QFY23 as profits from the construction and property investment segment dropped.
After adjusting for the pandemic and inflationary impact on construction projects (RM48mil) in 4QFY22, construction EBIT fell 52% QoQ to RM9mil in 1QFY23 from RM19mil in 4QFY22 due to weaker margins.
After adjusting for rebates granted to tenants of RM7mil and net fair value gains of RM72mil in 4QFY22, EBIT from the property investment declined by 27% QoQ to RM33mil in 1QFY23.
As there were no Bursa announcements, we believe that WCT had not secured substantial jobs in 1QFY23. Hence, we estimate that the group’s order book declined 6% QoQ to RM3.3bil as at end-Mar 2023. This translates to 1.4x FY23F construction revenue.
In spite of this, we are maintaining a FY23F replenishment assumption of RM3bil, with potential job wins including Subang Airport Regeneration Plan (SARP). Recall in 2021, the cost for SARP was RM1.3bil.
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 the property investment segment, we are positive on the recovery of footfalls and occupancies in the group’s shopping malls and hotels.
WCT’s challenges include (i) 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 9x, at parity to our benchmark for small-cap construction stocks.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....