Highlights

• Hosts briefing. We attended WCT?s 4QFY16 investor?s briefing last Friday. To recap, FY16 core earnings of RM100m (+89% YoY) were within expectations.
• Orderbook at a high. WCT?s orderbook currently stands at RM5bn, an all-time high which translates to a strong cover ratio of 3.2x on FY16 construction revenue. Looking ahead, management is targeting to add RM2bn in new job wins this year. It has submitted RM2.5bn in tenders and has another RM2.5-3bn which is under preparation.
• Focus on infra jobs. After adjusting for EIs, WCT?s construction EBIT margins remained thin at 3.8% (FY15: 3.7%). Management guides that this should improve in FY17 as more infra based jobs are executed vs building related ones. We were made to understand that historically, WCT garners higher margins on infra jobs given its forte in that segment. Currently, 84% of its orderbook comprises infra related jobs. Management indicated that it has sufficient capacity to secure more infra contracts.
• Mall disposal still in focus. In efforts to de-gear, WCT is in the midst of exploring the possible sale of its AEON BBT and Paradigm malls. It is currently in talks with both a REIT and fund for the potential sale. Previous indications were that WCT is looking at a price tag of RM500m for AEON BBT and RM700m for Paradigm. We do not discount the possibility of a disposal to PREIT (HOLD, TP: RM1.77) given its common major shareholder with WCT, i.e. Tan Sri Desmond Lim.
• Herculean task for sales. Despite no new launches slated for FY17, management is targeting for property sales of RM500m. This is solely derived from existing and incoming inventory amounting to c.RM1bn. To drive sales, WCT will be offering attractive rebates and incentives for developments in which it has low land cost (e.g. Klang). However, we feel that its target of RM500m will be a Herculean task given soft property market conditions. Putting things into perspective, even with new launches, WCT only managed to hit RM281m in sales for FY16 vs its initial target of RM600m.

Risks

• The key risks are its inconsistency in earnings delivery from quarter to quarter and high net gearing (91%).

Forecasts

• Unchanged as the briefing yielded no surprises. Rating Maintain HOLD, TP: RM1.97
• The strategic direction brought by its new major shareholder TS Lim appears pretty much a status quo. We reckon that any rerating potential is likely to be muted unless earnings delivery becomes more consistent and its de-gearing plans bear fruit.

Valuation

• Our SOP based TP of RM1.97 implies FY17-18 P/E of 17x and 14.6x respectively and has taken into account the recently proposed 10% share placement.

Source: Hong Leong Investment Bank Research - 27 Feb 2017