Investment Highlights

• We maintain HOLD on WCT Holdings (WCT) with a higher fair value (FV) of RM0.49/share (vs RM0.42/share previously) based on FY24F PE of 12x (from 9x previously), in line with our benchmark for larger cap construction stocks. There is no FV adjustments for ESG based on our 3-star ESG rating.

• 1HFY23 core net profit (CNP) of RM5mil was below expectations as it only accounts for 8% of FY23F CNP and 7% of consensus estimates. The deviation is due to mainly slower-than-expected progress billing of its construction projects. As such, we reduce FY23F earnings by 15%.

• 1HFY23 revenue decreased by 29% YoY to RM579 mil compared to the first half of the preceding year. The lower turnover figure is mainly contributed by a 23% YoY drop in the engineering and construction segment, impacted by slower pace in construction progress.

• 1HFY23 turnover for property development decreased by 55% YoY to RM146mil as the higher revenue in 1HFY22 was contributed by a RM214mil disposal of land. Nevertheless, the revenue decline in 1HFY23 is partly offset by a 13% YoY increase in the property investment, driven by higher occupancy and rental rates for malls and hotels. We highlight that the higher 1HFY22 net profit was due to a lumpy RM56mil profit from the sale of lands and lower effective tax rate of 23% vs. 35% in 1HFY23.

• On a sequential basis, 2QFY23 revenue increased by 5% mainly from a doubling in property development that was partly offset by a 10% decline in the engineering and construction segment.

• 2QFY23 turned around to a core net profit of RM12mil compared to a loss of RM6mil in 1QFY23 due to absence of distribution of profits on perpetual Sukuk.

• As there were no Bursa announcements, we believe that WCT had not secured substantial jobs in 1HFY23. Hence, we estimate that the group’s order book declined by 6% QoQ to RM3.3bil as at end-June 2023. This translates to reasonable 1.4x FY23F construction revenue.

• In spite of this, we are maintaining 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.

• 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 12x, at Parity to Larger Cap Construction Stocks.

Source: AmInvest Research - 30 Aug 2023