Highlights

Laggard for a reason… Insofar, WCT’s share price has been a laggard compared to its peers. YTD, its share price is up by 2.1% vis-à-vis KLCON Index’s 19.1%. We believe that this is due to its lacklustre order book win and the loss of its Oman project. YTD, WCT has only secured RM484m worth of projects which is insufficient considering its annual construction revenue of RM1bn-1.4bn.

Being prudent… WCT emphasises on being prudent during tendering and has been proven right in the example of the LRT extension and MRT project whereby margins are unattractive at low to mid single digit range. There is no immediate pressure to replenish its order book as outstanding order book of RM2.3bn translates to 2.3x FY12’s construction revenue.

Prospects still there… Prospects are still with WCT for the RM800m Universiti Malaysia Sabah teaching hospital and Qatar road and bridge project worth RM1bn.

Property for growth… Although 1HFY13 only achieved 29% (RM225m) of new property sales target of RM775m for FY13, it was mainly due to timing of launches. In 3Q, we estimate that WCT has secured >RM300m in new sales through Medini Signature Condo (GDV: RM400m) and Laman Greenville (GDV: RM110m), bringing YTD new sales achieved of >RM500m (>65% of FY13 target). The next major launch to drive new sales will be Ascent@Paradigm (GDV of RM200m). The property division has been the earnings growth driver for WCT. Overall, as of 1HFY13, WCT has an unbilled property sales of RM480m, translating to 1.0x FY12’s property revenue.

Gateway losses… Although Gateway@KLIA2 is completed, it relies on the overall completion of KLIA2 to start operations, which is slated by 2QFY14. Hence, we believe that losses mainly from financing charges will offset profits from Paradigm Mall. As of August, 75% floor space of the latter has been rented out.

Risks

Execution risk; Regulatory and political risk (both domestic and overseas); Rising raw material prices; Unexpected downturn in the construction and property sector; and Failure in securing new sizable construction contracts.

Forecasts

Unchanged.

Rating

HOLD

Although we favour WCT for its prudent management and growing property and recurring income divisions; major contract wins has been elusive coupled with the potential start-up losses from Gateway@KLIA2. Hence, we are maintaining our HOLD call on WCT. However, any significant contract win will rerate our recommendation upwards.

Positives: (1) Major contract wins; (2) Growing recurring investment income; (3) Strategic land banking exercise; (4) Listing of property division.

Negatives: (1) Failure to secure new sizable projects; (2) Slower than expected take up rate for property launches.

Valuation

TP maintained at RM2.41 based on unchanged 14x average FY13-14 earnings.

Source: Hong Leong Investment Bank Research- 4 Oct 2013