Results

• WCT reported 3QFY14 revenue of RM471m (+13% YoY, +17% QoQ) and earnings of RM26m (-38% YoY, -25% QoQ). For the cumulative 9M period, core earnings amounted to RM100m, down 40% YoY.

Deviation

• 9M earnings only made up 60% of our full year forecast (61% of consensus) which is below expectations due to higher-then-expected margin compression.

Dividends

• None. Dividends usually declared in 2Q (3.5 sen) and 4Q.

Highlights

Margins compress. Despite revenue being inline (9M made up 74% of full year forecast), earnings disappointed due to margin compression. Construction EBIT margin slumped to 6.4% in 3Q from 10-11% in 1H due to additional cost incurred for the completion of the New Doha International Airport. The project is at its tail end of completion and forms less than 1% of WCT’s orderbook balance as of 3Q.

Decent job wins but… WCT has secured 2 contracts YTD (RAPID roads and Ikano Mall) totalling RM994m (FY13: RM670m). Its orderbook currently stands at RM2.3bn, implying a cover of 2.1x on FY13 construction revenue.

…cautious on outlook. WCT has bid for RM4bn contracts (50% domestic) and is preparing tenders for another RM3.1bn (58% domestic). We remain cautious on WCT’s job win outlook due to (i) intense competition for its domestic bids and (ii) timing uncertainty for the rollout of foreign ones.

Subdued property sales. 9M property sales amounted to RM497m. WCT has cut its FY14 sales target from RM1.2bn to RM617m, inline with our assumption of RM600m. Unbilled sales now stand at RM589m, translating to a 1.4x cover on FY13 property revenue.

Risks

• Stiff competition for jobs that it is bidding for.
• Slow property sales.

Forecasts

• We cut FY14-16 earnings by 15%, 7% and 6% respectively as we impute lower construction margins. Earnings outlook unexciting with a 3 year CAGR of only 2.4%.

Rating

HOLD, TP: RM2.04

• Despite the weak results, we maintain our HOLD rating as share price has already declined 12% month-to-date.
• The saving grace comes from its various investment properties (AEON BBT, Paradigm, Gateway@klia2 and Premiere Hotel) that would provide stable income.

Valuation

• Apart from our earnings cut, we also lower our P/E target in our SOP based valuation from 14x to 12x, reflecting the lower end of its historical range.
• All in all, our SOP based TP (at a 10% discount) is reduced from RM2.34 to RM2.04, implying FY14 -15 P/E of 15.6x and 13.5x respectively.

Source: Hong Leong Investment Bank Research - 25 Nov 2014