Investment Highlights

• We cut our FY18F forecast by 29% but leave FY19-20F numbers relatively unchanged. We keep our 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.

• Excluding one-off items (largely RM35mil profits from land sales in Serendah, as well from the LRT3 compulsory land acquisition), WCT's 1HFY18 core net profit of RM45mil came in below expectations at only 33% of our full-year forecast and 29% of full-year consensus estimates.

• We believe the variance against our forecast came largely from: (1) lower-than-expected property development profits; and (2) higher-than-expected interest cost.

• 1HFY18 core net profit fell 40% YoY as stronger construction profits and rental incomes were offset by weaker property development profits and higher interest expense.

• YTD, WCT has only secured one key construction contract, i.e. the RM555mil building job for Lendlease’s shopping mall in Tun Razak Exchange (TRX), boosting its outstanding construction order book to RM5.8bil (Exhibit 2). Our forecasts assume construction job wins of RM1.2bil annually in FY18-20F.

• We remain cautious on the outlook for the local construction sector. As the government scales back on public projects, local contractors will be competing for a shrinking pool of new jobs in the market. Severe undercutting among the players will result in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector. We believe WCT is mitigated by its substantial order backlog that should keep it busy over the next 2-3 years, coupled with its proven ability to compete under an open bidding system.

• Similarly, we are cautious on WCT’s other key businesses such as property development (due to the prolonged downturn in the local property market) and property investment (due to the oversupply of retail space in the market, coupled with e-commerce’s encroachment onto the brick-and-mortar shopping malls).

Source: AmInvest Research - 28 Aug 2018