News

• Secures infra contract at TRX... WCT was awarded a RM754.8m contract from 1MDB involving infrastructure and roads at the Tun Razak Exchange (TRX). The scope of works comprises earthworks, underground road structures, buried utilities and roadways. Payment for the job will be based on 3 milestones over the contract duration of 687 days (slightly below 2 years).

• …and buys land as well. WCT also announced that it will be acquiring several plots of land in the TRX totalling 1.65 acres from 1MDB for a price tag of RM223m. Payment for the said lands will be in the form of (i) deposit of 10% (RM22.3m) of the purchase consideration to be paid in cash and (ii) balance 90% shall be paid in 3 tranches which will be offset against the milestones of the infra and road contract.

Comments

• Significant job win. We are positively surprised by this sizable contract secured by WCT, bringing its YTD job wins to RM1.8bn, almost double of that achieved in FY14 (RM993m). We estimate its orderbook to currently stand at RM3.4bn, translating to a healthy 3x cover ratio on FY14 construction revenue.

• Price appears “relatively” fair. The purchase price of the TRX lands translates to RM3,098 on a psf basis. Recent land transaction at TRX happened at RM2,736psf (Lembaga Tabung Haji) and RM4,699psf (Affin Bank). As WCT’s price tag is within the range of recent transactions, we deem it to be “relatively” fair. WCT intends to develop high end service apartments with retail components on the said lands with an estimated GDV of RM1.1bn.

• Balance sheet will be stretched. The acquisition of the TRX lands will increase WCT’s already high net gearing of 81.2% to 91% on a proforma basis.

Risks

• High net gearing is a concern.

Forecasts

• YTD job wins of RM1.8bn has surpassed our orderbook replenishment assumption of RM1.2bn. As such, we raise our assumption to RM1.8bn which bumps up FY15-17 earnings by 2.4%, 6.5% and 3% respectively.

Rating

• HOLD, TP: RM1.41
• With strong YTD job wins and a healthy orderbook level, earnings visibility has certainly been enhanced. As such, we upgrade our rating from a Sell to HOLD. The stock is not an outright Buy as we remain concerned on its (i) patchy quarterly earnings delivery and (ii) high net gearing.

Valuation

• Aside our earnings upgrade, we also lower our SOP discount from 20% to 10% which lifts our TP from RM1.23 to RM1.41. This implies FY15 P/E of 22.9x but a more palatable 12.7x for FY16 once earnings recover.

Source: Hong Leong Investment Bank Research - 20 Oct 2015