Results

• WCT reported its 1QFY17 results with revenue of RM383m (-19% QoQ, -34% YoY) and core earnings of RM38m (+1% QoQ, +73% YoY).
• Cumulative 1H revenue amounted to RM857m (-20% YoY) while core earnings totalled RM75m (+40% YoY).

Deviation

• 1H core earnings were above expectations at 62% of our full year forecast but within consensus at 50%. The higher than expected results was due to stronger than expected recovery in construction margin.

Dividends

• No dividend declared.

Highlights

• Construction margin recovers. Despite a 30% YoY fall in 1H construction revenue, division EBIT (ex. forex) rose 58% thanks to margin recovery from 5.2% to 11.8%. The recovery was driven by higher contribution from local jobs being executed which command healthy margins as opposed to legacy jobs that dragged margins previously. Management expects better margins this year given the higher proportion of infra jobs that will be executed (as opposed to buildings).
• Slow job wins but momentum to pick up. Admittedly, job wins have been slow for WCT this year with the YTD sum at RM186m (LRT3 depot). Nonetheless, we estimate its orderbook balance to remain healthy at RM4.1bn, implying 2.8x cover on FY16 construction revenue. WCT has tendered for over RM10bn worth of jobs, of which 50% are infra based. We gather that WCT is one of the frontrunners to secure a package of the LRT3 (RM9bn).
• Property remains challenging. While 1H property revenue increased 34% YoY, EBIT fell by 26%. We reckon that the margin compression could be due to more aggressive discounts provided along with other buyer incentives such as free fit-outs. Management’s focus for this year remains on driving sales from existing and incoming inventories.

Risks

• High net gearing of 86%, although we note that this has reduced from 95% in 1Q.

Forecasts

• We raise FY17-19 earnings by 13%, 9% and 4% after imputing stronger than expected construction margin recovery. Rating Upgrade to BUY, TP: RM2.26
• Albeit with a cautious stance, we are turning positive on WCT given its results recovery. Coupled with its 20% share price decline since mid-May, we feel there is now sufficient buffer to warrant an upgrade in our call from Hold to BUY.

Valuation

• Following our earnings upgrade, our SOP based TP is raised from RM2.15 to RM2.26, implying FY17-18 P/E of 23x and 20x. While this is rather steep, WCT significant surplus land value (i.e. market value less BV), backing 63% of its market capitalisation.

Source: Hong Leong Investment Bank Research - 25 Aug 2017