Highlights

• Hosts 3QFY15 briefing. WCT hosted an investor’s briefing yesterday post 3QFY15 results. To recap, 9M core earnings of RM28m (-72% YoY) was significantly below our expectations and consensus. Management indicated that this was due to: (i) provision of RM30m for the administrative building job in Qatar; (ii) arbitration costs for the Nad Al- Sheba Racecourse of RM10m; and (iii) additional interest expense of RM10m for debt on undeveloped land which can no longer be capitalised.

• Recovery in 4Q? This is the 2nd consecutive quarter that WCT has reported extremely weak results. Work on the Qatar building job is 94% complete as of 3Q and is scheduled for hand over in Dec. As such, earnings may still be dragged by this job in 4Q. Management guides that any significant earnings recovery is likely to kick off only in FY16 which will be driven by recognition of its newly secured jobs.

• Strong job wins but… WCT has managed to amass RM2.7bn worth of new job wins YTD (FY14: RM993m), the highest achieved in the last 8 years. Its orderbook of RM4.1bn implies a healthy cover ratio of 3.6x on FY14 construction revenue.

• …are margins at stake? Management rebutted concerns that margins on its new contracts were sacrificed. It explained that it has significant capacity to undertake more infra jobs as orderbook earlier this year was dominated by buildings. In fact, all of WCT’s new job wins this year consist of infra works, an area in which it claims to have expertise and commands relatively higher margins.

• Tough property market. With 9M sales at RM307m, management feels that it is unable to meet its full year target of RM580m (FY14: RM461m). To boost sales, WCT will launch some medium cost apartments in Klang in 4Q. Unbilled sales of RM572m imply 1.5x revenue cover.

Risks

• Inconsistency in earnings delivery from quarter to quarter.

Forecasts

• Unchanged as there were no surprises from the briefing. We have already cut our FY15-17 earnings by 35%, 16% and 17% respectively, following the dismal 3Q results.

Rating

• Maintain HOLD, TP: RM1.41
• Despite strong job wins, the disappointing results leave us with a lingering scepticism on how swiftly this can translate to an earnings recovery. Whilst it is tempting to upgrade to a Buy on a potential earnings rebound, we are taking the prudently patient stance with our HOLD rating until more convincing recovery signs are seen.

Valuation

• Our SOP based TP of RM1.41 implies a hefty FY15 P/E of 35.1x but a more palatable 15x on FY16 once earnings recover (this being the caveat given its inconsistency in earnings delivery).

Source: Hong Leong Investment Bank Research - 26 Nov 2015