Results

• WCT’s 3QFY15 results came in with revenue of RM371.8m (-21% YoY, -12% QoQ) and weak core earnings (ex. forex gains) of RM7.2m (-72% YoY, +12% QoQ).

• While reported earnings for 9M stood at RM150.2m, this was artificially boosted by forex gains of RM121.9m. Stripping this out, 9M core earnings only amounted to a meagre RM28.3m, down 72% YoY.

Deviation

• Despite our earnings already being 40% below consensus, the results continue to disappoint. 9M core earnings only made up 38% of our full year forecast (23% of consensus).

• The weak results mainly stemmed from the construction segment which saw thin EBIT margin of only 4.5% for the 9M period. Revenue also slowed QoQ by -28% possibly due to timing differences between the completion of old jobs and the commencement of newer ones.

Dividends

• No dividend was declared during the quarter.

Highlights

• Job wins at a record high. YTD job wins have totalled RM2.7bn, the highest in the last 8 years. This brings WCT’s orderbook to RM4.1bn, implying a healthy cover of 3.6x on FY14 construction revenue. As the bulk of the new jobs were secured in the months of Sept-Nov, they did not contribute to 3Q earnings.

• Flattish property sales. Property sales YTD stood at RM307m, a decline from RM497m in the same period last year. This makes up 68% of our RM450m full year target (FY14: RM461m). Unbilled sales of RM584m offers a 1.5x cover on FY14 property revenue.

Risks

• WCT’s net gearing is high at 77% while consistency in earnings delivery is not present.

Forecasts

• Despite our already below consensus projection, we administer another round of earnings reduction by 35%, 16% and 17% for FY15-17 respectively. This captures weak construction margins in FY15 and a slower than expected recovery in FY16-17.

Rating

• Maintain HOLD, TP: RM1.41
• Making a call on WCT is a tough one. On one hand, earnings have disappointed for 2 consecutive quarters and FY15 could possibly be the worst year in a decade. However, on the other hand, job wins have come in exceptionally well (highest in the last 8 years). After weighing these factors, we retain our HOLD rating.

Valuation

• Despite our earnings cut, our TP is unchanged at RM1.41 as we remove our 10% SOP discount. We reckon this move is warranted as risks to slow orderbook replenishment is no longer present.
• Our TP implies an expensive 35.1x FY15 P/E but a more palatable 15x on FY16 once earnings recover.

Source: Hong Leong Investment Bank Research - 25 Nov 2015