Highlights

• Interest capitalisation explained. Last Friday, we attended WCT’s 4QFY15 investor’s briefing which was hosted by its Executive Director, Kenny Wong. To recap, FY15 core earnings of RM69m (-37% YoY) was above expectations. This was largely due the finance cost reversal from prior quarters amounting to RM20m in 4Q. The reversal resulted from a change in accounting policy where WCT can now capitalise finance cost for debts associated with its landbank.

• Sizable orderbook... WCT’s orderbook stands at a record RM4.1bn, translating to a healthy cover ratio of 3.2x on FY15 construction revenue. This follows from superior job wins of RM3bn last year, an all-time high.

• …with more to come. For FY16, WCT is gunning for RM2bn in new job wins. Over the near term, it is eyeing on an infra package for Kwasa D’sara (RM300m) which should be out anytime soon. Via a JV with KKB Engineering (Not Rated), WCT is one of the 17 prequalified consortiums for the 10 packages of the Sarawak Pan Borneo (RM16bn). Apart from that, WCT is also targeting for (i) external infra works at TRX, (ii) smaller RAPID packages and (iii) highway jobs such as WCE, DASH and SUKE. It has also been prequalified for the LRT3 (RM9bn), MRT2 (RM28bn) and KL118 infra works.

• Challenging property outlook. FY15 property sales of RM373m fell 19% YoY with unbilled sales at RM599m (1.8x cover on FY15 property revenue). WCT is targeting for RM600m worth of property sales this year. In March, it will be launching a condo block (GDV: RM480m) at the Paradigm Garden City, OUG with indicative pricing at RM800-850psf. We reckon that WCT’s sales target could prove to be an uphill task and retain our lower assumption of RM400m.

• De-gearing plans laid out. In efforts to reduce its net gearing (currently at 79%), WCT will embark on the following (i) dispose 50% of its Serendah land stake (ii) listing its construction arm and (iii) monetising its investment assets via a REIT. These initiatives are expected to generate net proceeds of RM1.5bn and reduce its net gearing to 40%.

Risks

• Inconsistency in earnings delivery from quarter to quarter.

Forecasts

• No changes to forecast. While finance cost will reduce due to capitalisation, this will eventually come at the expense of lower property margins.

Rating

• Maintain BUY, TP: RM2.15
• We expect WCT’s earnings to see a reversal of fortunes this year, underpinned by its mammoth orderbook. The impending listings of its REIT and construction arm are telltale signs that a positive earnings momentum is forthcoming.

Valuation

• Our SOP based TP of RM2.15 implies FY16 P/E of 22x but this reduces to 17x in FY17 once earnings kick in. Valuation is also backed by RM1.7bn in net surplus value of its land (RM1.39/share).

Source: Hong Leong Investment Bank Research - 29 Feb 2016