Highlights

Stiff competition for domestic tenders . WCT is eyeing RM3.8bn worth of domestic tenders. These include (i) subcontract civil works at RAPID (RM1bn); (ii) infra works for TRX (RM300-400m); and (iii) Warisan Merdeka (RM3bn) where it has been prequalified with JV partner, Arabtec. On the flipside, WCT is not keen to participate in the West Coast Expressway as the open tender portion is said to have been broken down into too many small packages.

Still fluid overseas. Overseas, WCT has RM3.3bn worth of tenders (both potential and submitted). It is still awaiting the outcome of an infra and road job (RM1bn) in Qatar. While contract sizes in the Middle East are large, its implementation timeline remains fluid.

Slow property sales. Property sales for the 9M period amounted to RM497m, of which, RM120m are bookings. The Azure Residence (GDV: RM490m) at Paradigm has seen 46% take up rate for Tower 1 (GDV: RM200m). Given the softening property market, WCT has lowered its sales target from RM1.2bn to RM617m this year, inline with ou r unchanged assumption of RM600m.

Exploring REIT option… WCT is exploring the option of injecting its investment properties (i.e. AEON BBT, Paradigm and Gateway) into a REIT next year. Based on the EBITDA generated by these 3 properties totalling RM110-125m, we estimate the REIT to be worth RM1.8-2.1bn at a 6% cap rate. We understand that WCT’s internal valuation of these properties stands at more than RM2bn.

…but still at early stages. We are positive on WCT’s move to monetise its investment propert ies. However, we feel that this move is still in its early stages with hurdles such as (i) getting consent from other stake holders such as EPF and MAHB which own minority stakes in Paradigm and Gateway respectively and (ii) for Gateway to get its 10 year extension approved to lengthen the concession duration to 25 years.

Risks

• Slow orderbook replenishment and property sales.

Forecasts

• Unchanged. Our forecast has already been cut by 6-15% following the disappointing 3Q results.

Rating

HOLD TP: RM2.04

• WCT’s domestic tenders are facing stiff competition while timing of its foreign ones are fluid, giv ing uncertainty to job wins while property sales are also weaker than expected. Nonetheless, the saving grace comes from the potential monetisation of its investment properties which may support share price on the downside.

Valuation

• TP is based on a 10% discount to SOP method which implies FY14-15 P/E of 15.6x and 13.5x respectively, vis -àvis its mean of 16x (based on 1 year forward earnings).

Source: Hong Leong Investment Bank Research - 26 Nov 2014