News

• Earthworks for TRX. WCT was awarded a RM70.4m earthworks job from 1MDB for the Lifestyle Quarter at the Tun Razak Exchange (TRX). The overall scope of works involves earthworks, rock probing and grouting works which are scheduled for completion by Nov 2016 (slightly more than 1 year from now).

Comments

• Smallish job win. This relatively smallish contract brings WCT’s YTD job wins to RM1bn, making up 87% of our full year assumption of RM1.2bn but still far away from management’s target of RM2bn.

• Building up but more needed. With this job in the bag, WCT’s orderbook is estimated to stand at RM2.7bn, translating to a cover ratio of 2.3x on FY14 revenue. While this ratio is not exactly low (peers average: 2.7x), we opine that more contract 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.

Risks

• Slow orderbook replenishment and softening property market.

Forecasts

• Our forecasts are unchanged as YTD job wins are still within our full year target.

Rating

SELL 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, the key is to actually bring it above its burn rate which we remain sceptical.
• We feel that the recent share price run up is unjustified given the weak (not to mention volatile) earnings that WCT has been posting. It currently trades at an expensive 24.1x FY15 P/E but a more palatable 13.9x on FY16 (assuming earnings delivery does actually set in). As such, we downgrade our rating from Hold to SELL.

Valuation

• Our SOP based TP of RM1.23 (20% discount) implies a hefty FY15 P/E of 20.4x but at a lower 11.7x for FY16 once earnings recover (this being the caveat given its inconsistency in earnings delivery).

Source: Hong Leong Investment Bank Research - 6 Oct 2015