Results

• WCT reported 3QFY16 results with revenue of RM414m (+11% YoY, -29% QoQ) and core earnings of RM20m (+181% YoY, -8% QoQ). Cumulative 9MFY16 core earnings amounted to RM74m, increasing +161% YoY amid a low base last year.

Deviation

• While 9M revenue was inline at 75% of our full year forecast, core earnings disappointed at only 61% (consensus: 56%).

• The disappointment resulted from the construction division which suffered losses in 3Q (EBIT: -RM3m). This is rather surprising as 2HFY16 was expected to witness a margin recovery, fuelled by the contribution of its newer jobs that were secured last year.

Dividends

• None declared.

Highlights

• Job wins have been strong. WCT has managed to secure RM1.4bn worth of jobs YTD (FY15: RM3bn), with the latest being the MRT2 from Bandar Malaysia South to Kg Muhibbah (RM896m). With this, we estimate its orderbook to stand at RM4.4bn, translating to a healthy cover 3.8x on FY15 construction revenue.

• Changes major shareholder. Earlier this month, WCT saw a significant change in its major shareholders with founders Mr Tiang and Mr Wong (via WCT Capital) exiting the company by selling their 19.7% stake to property mogul, Tan Sri Desmond Lim (TS Lim) at RM2.50/share.

• A new direction? We reckon that the emergence of TS Lim in WCT could feed it with building related jobs from the former’s property companies (e.g. Malton). Also, given the common shareholding between WCT and PREIT, we cannot discount the possibility of the former’s malls eventually being injected into the latter.

Risks

• WCT’s net gearing is high at 88% while earnings delivery lacks consistency from quarter to quarter.

Forecasts

• We cut FY16-18 earnings by 17%, 12% and 8% respectively to reflect a less than promising recovery in its construction margins as earlier envisioned.

Rating

BUY rating under review, TP: RM2.14

• While the results were uninspiring, we reckon that the emergence of TS Lim at a 30% premium to the last share price close could offer a buffer on the downside.

• Our BUY rating is under review pending today’s briefing where we shall seek more clarity on its margin outlook and more importantly, strategic direction going forwards as brought by its new major shareholder.

Valuation

• Despite the earnings cut, our SOP based TP is relatively unchanged at RM2.14 (from RM2.12) as we roll over from mid-CY17 to FY17. This implies FY16-17 P/E of 26.8x and 18.4x respectively

Source: Hong Leong Investment Bank Research - 22 Nov 2016