Highlights

• Hosts 2Q15 briefing. WCT hosted an investor’s briefing last Friday post 2QFY15 results. To recap, 1H core earnings of RM21.2m (reported: RM64.3m) was down 72% YoY, significantly below our expectations and consensus.

• Potential jobs in the pipeline. WCT has bid for RM4.7bn worth of jobs and has another RM3.9bn tenders under preparation. Near term potential wins include the TRX infra works (RM800-900m) where WCT is one of the finalists and an interchange job for the WCE (RM600m). Management also guided there could be a potential revival of the Kota Kinabalu water supply scheme (RM2bn).

• Finalist for KL118? WCT, (via a JV with UAE based Arabtec) has submitted its bid for the KL118 tower (RM3bn). Our channel checks reveal that the Arabtec-WCT JV and Samsung-UEM JV are the finalists for the job. While Arabtec did participate in the Burj Khalifah (worlds’ tallest building), Samsung was the lead contractor. Furthermore, Samsung also constructed another 2 of the world’s top 10 skyscrapers, namely the Petronas Twin Towers and Taipei 101.

• More wins needed. WCT’s RM2.5bn orderbook implies a cover ratio of 2.2x. While this ratio is not exactly low (peers average: 2.7x), we opine that more job wins are needed to propel growth as WCT’s orderbook replenishment has lagged behind its burn rate in 3 out of the last 4 years.

• Property margins to contract? YTD property sales stood at RM241m (54% of our FY15 target). While sales were flat YoY (good considering the soft property market), we caution on a subsequent potential margin erosion. This is because 39% of its new launches this year will comprise affordable apartments under the “Rumah Selangorku” programme.

Risks

• Slow orderbook replenishment and softening property market.

Forecasts

• Unchanged as there were no surprises from the briefing. We have already cut our FY15-17 earnings by 44%, 17% and 5% respectively, following the dismal 2Q results.

Rating

HOLD, TP: RM1.23

• Whilst management is upbeat on its construction prospects, we caution on the highly competitive landscape for the jobs that it is gunning for. Although job wins have been decent YTD (RM868m), the key is to actually bring it above its burn rate which we remain sceptical.
• Nonetheless, downside should be mitigated by WCT’s recent favourable arbitration ruling which would see total cash infusion of RM1.2bn potentially over the next 2-3 years.

Valuation

• Our SOP based TP of RM1.23 implies a hefty FY15 P/E of 20.4x but a more palatable 11.7x on FY16 once earnings recover (this being the caveat given its inconsistency in earnings delivery).

Source: Hong Leong Investment Bank Research - 24 Aug 2015