Highlights

• Margins under pressure. WCT saw its construction EBIT margin shrink to a low of 2.8% in 4QFY14. This was due to the downward revision in its profit margin target for 2 local projects, namely the MITI Headquarters (RM301m) and KK Medical Centre (RM331m). In terms of completion rate, the former is at 66% while the latter at 79%. Collectively, these 2 jobs make up 9% of WCT’s outstanding orderbook.

• Uphill challenge for PTMP’s PDP role. While WCT has bid for RM22.8bn worth of domestic jobs, we highlight that this is concentrated (RM20bn) on the Penang Transport Master Plan (PTMP), putting it in an “all or nothing” situation. Going up against WCT for the PDP role are 3 domestic contractors (including Gamuda) and 2 foreign consortiums. We reckon that securing the PDP role will be an uphill challenge for WCT as (i) it has no PDP experience and (ii) it has a rather minimal track record undertaking jobs in Penang.

• Better chance with KL118. WCT, (via a JV with UAE based Arabtec) has submitted its bid for the KL118 tower (RM3bn). In total, 6 consortiums have been shortlisted for the job. We feel that WCT has a decent shot in securing the job by virtue of Arabtec’s track record which includes the world’s tallest building, the Burj Khaifah. Aside that, WCT is also preparing tenders for subcontract works at RAPID totalling RM1bn and the West Coast Expressway (RM1.3bn).

• Cautious on property sales. WCT is targeting RM650m worth of sales in FY15 (FY14: RM461m) backed by RM894m worth of new launches. We feel that this target is tough to achieve given the softening property market sentiment and have assumed RM500m in sales for FY15.

Risks

• WCT’s orderbook of RM2bn implies a cover of only 1.6x FY14 construction revenue, offering little earnings visibility. Orderbook replenishment for the last 2 years of RM670m and RM994m were below its average annual burn rate of RM1.2bn.

Forecasts

• We further cut our FY15-16 earnings by another 16% and 5% respectively on lower construction margins. This is on top of our previous cut of 13-22% yesterday during our 4QFY14 Earnings Evaluation report which merely captured the slow property sales. Our forecasts are now 30-36% below consensus which appears overly optimistic.

Rating

SELL TP: RM1.49

• WCT’s outlook remains challenging as it faces both slowing orderbook replenishment and property sales, resulting to a murky earnings outlook. Expect further cuts in consensus numbers to eventuate.

Valuation

• Post earnings cut, our TP is lowered from RM1.64 to RM1.49 based on a unchanged 20% discount to SOP which implies FY15-16 P/E of 13.3x and 12.4x respectively.

Source: Hong Leong Investment Bank Research - 27 Feb 2015