Investment Highlights

• We raise our FY18-19F net profit forecasts by 6% each, revise up our SOP-based FV by 2.5% to RM1.66 (Exhibit 2) (from RM1.62) but maintain our HOLD call, following an analyst briefing yesterday.

• We now regard WCT's FY17 results, announced last Monday, as within our forecast and consensus estimates (vs. below both expectations previously). This follows the disclosure by WCT of share of RM22.9mil fair value loss from Paradigm PJ in the results which we now exclude in our calculation of WCT's core net profit (Exhibit 1). We take comfort that WCT's fundamentals have not deteriorated as much as we have feared, and hence we upgrade our forecasts and FV accordingly.

• WCT guided for annual job wins of RM2bil in FY18F, which is in line with our replenishment assumption of RM2bil annually in FY18-20F. WCT said that it is eyeing work packages from West Coast Expressway, Pan Borneo Sabah Highway and "a couple of highways in Peninsular Malaysia", and tendering for several building jobs.

• WCT elaborated on the RM164.6mil impairment it made on receivables from a building job for the Ministry of Interior, Qatar. WCT said that the job had been completed (with the defect liability period ending the end of this year). The impairment arose because the client could not agree with WCT on WCT's billings on certain variation orders and prolongation claims. While negotiations were still ongoing to settle the account, to be prudent, WCT decided to make impairment on the part it believed that it was not getting the buy-in from the client.

• At present, WCT only has one outstanding project in the Middle East, i.e. the Lusail Development project also in Qatar, with an outstanding value of RM455mil. WCT said that the client has been "supportive" in terms of providing prompt payments as well as granting extension of time as and when issues arise. WCT hinted that this could be its last overseas project for now as "there are plenty of opportunities in Malaysia".

• WCT said that the listing of WCT REIT, by bundling in it Paradigm Mall in PJ (70%-owned), AEON Bukit Tinggi Mall (100%-owned) and Premiere Hotel in Klang (100%- owned), is now very much off the table. This is because AEON Co (M) Bhd (AEON), the tenant for its entire AEON Bukit Tinggi Mall, has now officially taken WCT to the court, with the next court hearing scheduled in April 2018.

• To recap, AEON is seeking a High Court injunction to prevent WCT from terminating the 10-year lease agreement for the mall it signed with WCT in 2007 (expired on 23 Nov 2017, with an option to extend for five years) and evicting AEON and its sub-tenants from the mall. AEON is not agreeable to WCT's plans to take back part of the mall's open car park space (main-road fronting, with an LRT3 station under planning next to it) for property development.

• We now believe that it is taking the new shareholder of WCT, Tan Sri Desmond Lim, much longer time to put the house in order. Only when WCT's operations and fundamentals are substantially stabilised, there will be a possibility that he would even consider turning WCT into his flagship PLC, via the injection of Malton (a sister company of WCT, with its prized asset being Pavilion Bukit Jalil) and his private business ventures including Pavilion Kuala Lumpur and Pavilion Damansara Heights.

• In conclusion, WCT's local construction division has turned the corner with the award of key infrastructure projects such as MRT2, LRT3 and Pan Borneo Sarawak Highway recently. However, earnings risks associated with its ongoing and newly completed (subject to a defect liability period of 18 months) projects in the Middle East remain elevated as reflected in the surprise lumpy impairment made recently (WCT is no longer pursuing new projects in the Middle East). Its property division is not spared the downturn in the property market and is weighed down by some RM550mil unsold stock (1.8x its property sales of RM305mil in FY17). WCT could be missing the window to list its matured investment properties under a REIT at good valuations against a backdrop of rising interest rate and surging supply of retail space in the market. All these, coupled with WCT's proposed placement of new shares of up to 10% of its existing paid-up capital, are likely to cap the upside in WCT's share price over the near term.

Source: AmInvest Research - 28 Feb 2018