- We maintain our HOLD call on WCT Holdings with a lower fair value of RM1.38/share (previous: RM1.55/share) on a 35% discount to its revised NAV/share of RM2.11/SHARE following a disappointing set of 9MFY15 results.

- For the 9M ending Dec 2015, WCT reported a net profit of RM150mil. However, the headline numbers were significantly boosted by lumpy gains on forex movements of RM122mil vs a RM1mil loss a year ago (3QFY15: RM79mil).

- Excluding this, its results would have been below expectations with core net profit only amounting to RM28mil.

- Assuming most of the forex gains relate to its construction projects, we estimate 9MFY15 construction margins to have shrunk to 2.8% vs 7% in 9MFY14 (3Q15 – 2.7%; 2Q15 – 3.2%). Together with softer property earnings, we have cut our FY15F core net profit forecast by 56% (FY16: - 33%, FY17F: - 28%).

- During the same period, property billings fell 21% YoY although the quantum of decline was much lower at the EBIT level (-2% YoY) following an improvement in margins (21% vs 17%).

- At the same time, earnings from its property investments fell 20% YoY (QoQ: -31%). We partly attribute this decline to the slower retail environment post-GST.

- While WCT’s recent orderbook replenishment has been impressive (new contract wins totalled RM2.7bil ytd vs only RM993mil for the whole of FY14), we underestimated the magnitude of a potential compression in WCT’s construction margins. This reinforces our cautious stance and HOLD rating on the group.

- Likewise, we remained concerned with WCT’s balance sheet constraints. While net gearing levels have improved slightly to 76% as at 30 September (30 June: 81%), rising cash flow commitments from ongoing and future property investments (e.g. Paradigm OUG) could further strain its cash flows.

- This, in turn, may prod the group to accelerate earlier plans to recycle capital locked up in its existing shopping malls into a REIT, in our view.

- The arbitration award of ~RM1.2bil from the Meydan Racecourse project would help. However, the exact timing and its structure is not immediately known for now.

Source: AmeSecurities Research - 25 Nov 2015