Results

• WCT reported 2QFY16 results with revenue of RM581m (+38% YoY, +20% QoQ) and core earnings (after stripping off forex impact) of RM22m (+240% YoY, -32% QoQ). While core earnings surged more than 2-folds YoY from a low base, the QoQ decline was due to lower construction margins.

• Cumulative 1HFY16 core earnings totalled RM54m, increasing 154% YoY given the low base effect in FY15.

Deviation

• 1H core earnings formed 45% of our full year forecast which is within our expectations but below consensus at 38%. We envisage a stronger 2H once orderbook recognition gains further traction.

Dividends

• None declared.

Highlights

• Construction margins swing. While construction revenue surged 33% QoQ, margins contracted from 7.1% to 3.8%, resulting to a -29% EBIT fall. This is likely attributed to the recognition of its older jobs with lower margins as opposed to newly secured ones. Nonetheless, on a cumulative 1H basis, construction margins expanded slightly YoY from 4.1% to 5.2% on back of a strong 50% topline growth.

• Orderbook towers new highs. WCT has managed to secure RM521m in new job wins YTD. Coupled with its record contract wins last year at RM3bn, this has propelled its orderbook to a new high of RM4.3bn. This implies a strong over ratio of 3.7x on FY15 construction revenue.

Risks

• WCT’s net gearing is high at 81% while earnings delivery lacks consistency from quarter to quarter.

Forecasts

• As the results were inline, we retain our FY16 earnings forecast.

• 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 record orderbook. The impending listings of its REIT and construction arms (albeit with a slight delay) are tell-tale signs that a positive earnings momentum is forthcoming.

Valuation

• Our SOP based TP of RM2.12 implies FY16 P/E of 22x but this reduces to a more palatable 16x for FY17 once earnings momentum gains further traction.

• 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 - 24 Aug 2016