Results

• WCT’s 1QFY16 results came in with revenue of RM485m (+38% YoY, -7% QoQ) and core earnings of RM32m (+117% YoY, -22% QoQ).

• Our derivation of core earnings strips off RM23m in forex losses for the quarter (1QFY15: RM19m forex gain).

Deviation

• 1Q core earnings formed 27% of our full year forecast. While tempting to claim it above expectations, given WCT’s past track record of patchy earnings delivery, we regard this to be inline. The results were however, below consensus at 21% of its full year forecast.

Dividends

• None declared. Usually in 2Q and 4Q.

Highlights

• Margins recovering. Despite being down 16% QoQ, we are pleased to note that construction revenue surged 51% YoY. Apart from the healthy topline movement, construction EBIT margins expanded to 7.1% from 3.6% in 1QFY15 and 3.7% in 4QFY15. The numerical trends verify our long held postulation that WCT’s earnings should stage a strong comeback once execution on its sizable orderbook gains traction.

• Orderbook level at a near high. While YTD job wins have been pedestal at only RM134m, we do not see this as an issue given that WCT has managed to amass a staggering RM3bn last year. We estimate WCT’s orderbook to stand at RM3.9bn as of 1QFY16, implying a healthy 3.4x cover ratio on FY15 construction revenue.

Risks

• WCT’s net gearing is high at 81% while earnings delivery has in the past, been inconsistent.

Forecasts

• As the results were inline, we retain our FY16 earnings forecast. However, we raise our FY17 projection by 10% as we turn more upbeat on its eventual and gradual recovery in construction margins.
• WCT will host an analyst briefing this morning.

Rating

• Maintain BUY, TP: RM2.12
• We envision that WCT will witness a reversal of fortunes this year, underpinned by its sizable orderbook. The impending listings of its REIT and construction arms are tell-tale signs that a positive earnings momentum is forthcoming.

Valuation

• All in all, our SOP based TP is relatively unchanged at RM2.12 (slight reduction from RM2.15 after we update our financial model following the release of its Annual Report).
• Our TP implies 22x FY16 P/E but a more palatable 16x for FY17 once its earnings recovery transitions into growth.
• WCT is also backed by its landbank which has a net surplus value of RM1.6bn translating to RM1.31/share.

Source: Hong Leong Investment Bank Research - 26 May 2016