Highlights

• Hosts briefing. We attended WCT?s 4QFY16 investor?s briefing yesterday. To recap, 1QFY17 core earnings of RM37.4m (+17% YoY) were above expectations.
• Better margins to sustain. WCT displayed a recovery in construction EBIT margin at 7.8% vs 4.2% last quarter and 7.1% in the same period last year. Management believes this can be sustained for the remainder of the year as bulk of the works to be recognised this year are infra based which carries higher margins vs building jobs. As of 1Q, 78% of WCT?s RM4.6bn orderbook comprises infra jobs.
• Gunning for more job wins. WCT has tendered for over RM10bn worth of jobs, of which 50% are infra based such as the LRT3 (RM9bn), MRT2 stations (RM1.5bn) and KL-Klang BRT (via BOT model). It is also tendering for RM3.5bn worth of domestic building jobs (e.g. offices, condos, malls and hotel) and RM1.8bn in Qatar. To ride on the increasing flow of local contracts awarded to China contractors, WCT has partnered 2 state owned enterprise (SOE) contractors which are eyeing on building and infra jobs. For FY17, WCT is aiming to replenish its orderbook by RM2bn (YTD: RM186m).
• Repricing existing developments. 1Q property sales only totalled RM49m (1QFY16: RM68m) with unbilled sales at RM387m (1.3x FY16 property revenue). Management is targeting for RM500m in sales for FY17 which we feel is an uphill challenge as no new launches are slated for this year. Instead, management aims to drive sales from its existing inventory of RM130m and incoming stock of RM1bn. To drive sales, WCT is repricing some of its existing developments by providing discounts and/or free fit-outs.
• De-gearing initiatives. To reduce its net gearing (currently at 95%), WCT will be undertaking (i) share placement of balance 35m shares to raise RM50m in 2H17, (ii) setting up its own REIT comprising Paradigm, AEON BBT and Premiere Hotel with market value of RM1.1bn to raise RM400m and (iii) land disposal in Sg Buaya (RM300m).

Risks

• Key risks are inconsistency in earnings delivery from quarter to quarter and high net gearing.

Forecasts

• Although 1Q results accounted for 31% of our full year forecast, we are taking a conservative stance and retaining our estimates. Rating Maintain HOLD, TP: RM2.15
• While WCT?s earnings are poised for a recovery that will be driven by its sizable orderbook, we remain cautious on its erratic earnings delivery and high net gearing.

Valuation

• Our unchanged SOP based TP of RM2.15 implies FY17-18 P/E of 24.7x and 20.8x respectively.

Source: Hong Leong Investment Bank Research - 31 May 2017