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.

• During an analyst briefing yesterday, WCT reiterated its guidance for job wins of RM2bil in FY18F. Our forecasts conservatively assume construction job wins of only RM1.2bil annually in FY18-20F. 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). It said that its focus will be on building jobs such as retail malls and offices.

• At present, its outstanding construction order book stands at RM5.4bil (Exhibit 1), which could be eroded by about RM250mil in tandem with Prasarana’s initiatives to reduce the scope and hence cost of the LRT3 project. WCT guided for about a RM100mil reduction from the cancellation of one station (Lien Hoe) and RM50mil each from the downsizing of three other stations within the two ground sections (i.e. GS02 & GS03) it is working on.

• Meanwhile, we believe WCT’s property division is still far from out of the woods, with its unsold stock only easing by 3% to RM603mil (2x its property sales of RM305mil in FY17) from RM624mil three months ago. It has set a property sales target of RM300mil in FY18. It only managed to lock in RM111mil property sales in 1HFY18. It has plans to beef up the marketing campaign for its RM379mil condominium project called Waltz Residences in OUG, KL. First put onto the market back in June 2016, the project has thus far only achieved a take-up rate of 38%. WCT has brought down the average selling price slightly to about RM700 per sq ft from RM750 per sq ft.

• 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 - 29 Aug 2018