Investment Highlights

• We maintain our forecasts, HOLD call and FV of RM0.92 based on 10x FY19F FD EPS, in line with our benchmark forward PE of 10-12x for mid-cap construction stocks. Amidst the uncertain outlook for WCT’s key divisions, i.e. construction and property, we believe that the market will derive greater comfort by valuing WCT via an earningsbased method, as the value of its assets, particularly, landbank and investment properties, may not be immediately realisable.
• Despite the change in the local construction landscape, WCT reiterated its guidance for job wins of RM2bil in FY18F. WCT said that it never included the East Coast Rail Link (ECRL), KL-Singapore high-speed rail and MRT3 in its original budgeting. Instead, it is eyeing various highway jobs in East Malaysia (worth about RM2bil) and privatesector building jobs (worth about RM5bil). It elaborated that of the RM5bil private-sector building jobs, about RM2bil could come from sister companies (such as Pavilion group) with the balance from Tun Razak Exchange (TRX) and Forest City in Johor.
• Our forecasts conservatively assume WCT to only secure RM1.2bil worth of new construction jobs annually in FY18- 20F. YTD, WCT has yet to bag any new contract. It won RM2bil worth of new jobs in both FY16 and FY17.

• We believe WCT’s property division is still far from out of the woods, with its unsold stock rising by 13% to RM624mil (2x its property sales of RM305mil in FY17) from RM550mil (1.8x its property sales in FY17) three months ago. The number could rise further during the year with the launch of the RM229mil Sapphire Residences in Paradigm PJ in 3QFY18, which is currently already near to completion. We are cautious on the take-up rate for the condominium project with 229 units priced from RM800 per sq ft. This is because the first condominium project in Paradigm PJ known as The Azure Residences with a GDV of RM190mil is only 56% sold thus far. The project, with 189 units priced at RM1,000 per sq ft with rebates, was first launched in 2014.

• WCT’s construction division is not spared the weakened prospects of the construction sector, as the government puts under review various mega infrastructure projects on grounds of fiscal prudence. These projects could potentially be deferred, scaled down or even cancelled. Also, the introduction of a more transparent public procurement system to plug leakages will translate to lower margins for players. Not helping either, are the prolonged downturn in the local property market and the glut in retail space that weigh down on WCT’s property division.

Source: AmInvest Research - 25 May 2018