Results

• WCT’s 2QFY15 results came in with revenue of RM422.3m (+5% YoY, +20% QoQ) and weak core earnings (ex. forex gains) of RM6.4m (-81% YoY, -57% QoQ).

• While reported earnings for 1H stood at RM64.3m, this was artificially boosted by forex gains of RM43.1m. Stripping this out, 1H core earnings only amounted to a meagre RM21.2m, down 72% YoY.

Deviation

• Needless to say, earnings were below expectations with 1H numbers only making up 16.5% of our full year forecast (15.4% of consensus).

• One reason for the weak results was due to arbitration cost associated with the Nad Al-Sheba Racecourse amounting to RM7-8m. This was expensed in 2Q following conclusion of the arbitration, which ruled in favour of WCT. While the client (i.e. Meydan LLC) is required to compensate for the arbitration cost (RM9m based on the ruling), WCT has decided to charge this out instead of capitalising it. As such, there could be an eventual write back.

• Other factors impacting the results were: (i) liquidated and ascertained damages (LAD) for 1Medini (RM5m); and (ii) certain prolongation claims not recognised for its Qatar jobs.

Dividends

• An interim dividend of 1 sen was declared.

Highlights

• No new job wins since. YTD job wins remained stagnant at RM847m (Lusail Development secured in March). WCT’s orderbook currently stands at RM2.5bn, implying a cover of 2.2x on FY14 construction revenue.

• Flattish property sales. Property sales YTD stood at RM241m (flat YoY), making up 54% of our RM450m full year target (FY14: RM461m). Unbilled sales of RM593m offers a 1.5x cover on FY14 property revenue.

Risks

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

Forecasts

• We cut FY15 earnings by 44% as we impute the abovementioned deviation factors. Aside that, we also reduce FY16-17 numbers by 17% and 5%, respectively, as we adjust downwards our construction and property margins.

Rating

• Downgrade to HOLD , TP: RM1.23
• In light of the weak results, we downgrade our rating from Buy to HOLD. Its earnings delivery remains inconsistent, exhibiting wild swings from quarter to quarter, an especially undesirable trait given the current market conditions. The downside is however, mitigated by the recent positive arbitration ruling which would see a cash influx of RM1.2bn.

Valuation

• Our SOP based TP is cut to RM1.23 (from RM1.73) following our earnings cut and applying a 20% discount.

Source: Hong Leong Investment Bank Research - 21 Aug 2015