- We maintain our HOLD call on WCT Holdings with a higher fair value of RM1.58/share (previous: RM1.38/share) on a 35% discount to its NAV following an earnings upgrade post its analyst briefing. We have also toned down our FY15F forecast to ~RM400mil (previous guidance: RM584mil) in tandem with a softer local market.

- At the briefing, we understand that there were a couple of one-off items that weighed down its reported earnings for the 9MFY15 period. These items were: (i) a RM10mil tax audit charge; (ii) RM10mil in legal charges for its arbitration case (Meydan Racecourse); and (iii) ~RM32mil in provisions for the new Ministry of Interior (MOI) headquarters project in Qatar.

- Adjusting for this, WCT’s 3Q15 core net profit would now be ~RM80mil (earlier estimate: RM28mil). 9M15 construction margins will subsequently be around 6.7% at the operating level, a tad lower than 7% a year ago.

- Looking ahead, management is guiding for construction margins of c.7%-8% at the pretax level – where the bulk of its newly secured orderbook (RM2.7bil ytd) are civil/infrastructure contracts that typically fetch better margins than building works. Our revised core construction pre-tax margin assumptions for FY16F-17F are 6.7% and 7.2% respectively (FY15F: 6.2%).

- Furthermore, the group is set to reap logistical savings via a few of its projects that are located close to each other (e.g. RAPID, TRX and MyTown Shopping Centre).

- Moving into 2016, WCT is targeting for more of such higher-value jobs. It hopes to crystallise one more new job from RAPID (~RM300mil-RM400mil) before year-end. Other prospects include the balance of TRX infrastructure works (~RM1bil), Jalan Tun Razak traffic dispersal (RM900mil), KL118 sub-contracts, Kwasa Damansara, Southern Double Tracking and Pan Borneo Expressway.

- Management is looking to unveil some measures to address its balance sheet issues within the next quarter or so. We nevertheless prefer to be prudent and maintain our HOLD call pending more concrete details.

- Not least, the proposed REIT by end-2016 will only comprise two malls (i.e. Paradigm Mall and BBT Mall) instead of three under the original plan. This is on the back of a weaker retail environment while MGS yields remain elevated.

- Upcoming property investment commitments are ~RM559mil as at 30 September, excluding Paradigm OUG. At the same time, the RM1.2bil arbitration claim for the Meydan project may take up to three years to materialise – where there structure of payments are also unknown at this juncture.

Source: AmeSecurities Research - 26 Nov 2015