Highlights

• Results explained. We attended WCT’s 2QFY16 investor’s briefing which was hosted by its Executive Director, Kenny Wong. To recap, 1HFY15 core earnings of RM54m (+154% YoY) were within expectations. Construction EBIT margin contracted QoQ from 7.1% to 3.8% due to (i) recognition of up front M&E cost of the My Town Shopping Centre and (ii) lower proportion of infra works recognised which carries higher margins vs building jobs. Effective tax rate for the quarter was exceptionally high at 45% due to capitalised interest cost which is non-tax deductible. Management guides for a stronger 2H once contribution from infra (mostly secured last year) gains further traction.

• Orderbook remains sizable. WCT’s orderbook remains sizable at RM3.8bn, implying a healthy 3.3x cover on FY15 construction revenue. Management maintains its RM2bn orderbook replenishment target for FY16 (26% achieved) but our target is more conservative at RM1bn. Management shared that it is no longer in the running for the SUKE and DASH highways as they were mostly awarded to smaller unlisted contractors. WCT has bid for 2 building jobs collectively worth RM1.5bn. It has also tendered for the MRT2 package from Bandar Malaysia to Kg Muhibbah (V204) and prequalified for the LRT3. In Qatar, WCT is in the midst of preparing tenders for several highways.

• Soft property sales. WCT’s unbilled property sales stands at RM529m (1.6x cover on FY15 property revenue). 1H sales came in at RM207m, declining -14% YoY. While management is holding on to its RM600m sales target for FY16, we reckon that our assumption of RM350m (59% achieved) would appear to be more realistic.

• De-gearing still in focus. WCT has re-evaluated its degearing plans which will now be centred on (i) monetization of its buildings (e.g. The Ascent and Paradigm Service Apartments) which will raise RM500m and (ii) REIT-ing its investment properties with estimated net proceeds of RM720m. The previously mentioned de-gearing plans such as private placement, land sale and listing of its construction arm have been temporarily put on hold.

Risks

• Derailing of its de-gearing plans.

Forecasts

• No changes to forecast as the results were inline and the briefing yielded no significant surprises.

Rating

• Maintain BUY, TP: RM2.12

• We expect WCT’s earnings to see a reversal of fortunes this year, underpinned by its sizable orderbook. Successful degearing is another potential catalyst.

Valuation

• Our SOP based TP of RM2.12 implies FY16 P/E of 22x but this reduces to 16x in FY17 once earnings kick in.
• Valuation is also backed by RM1.6bn in net surplus value of its land (RM1.31/share).

Source: Hong Leong Investment Bank Research - 25 Aug 2016