Highlights

• Sustainable margins. WCT’s construction margins saw a YoY recovery in 1H from 5.2% to 11.8%, driven by the execution of newer local jobs as opposed to low margin legacy jobs previously. Management believes that this level of margin can be sustained in 2H given its high proportion (79%) of infra based jobs in its orderbook. WCT generally garners higher margins for infra jobs compared to buildings.

• Contract flow to pick up. Although YTD job wins have been slow at RM186m (LRT3 depot), management is hopeful for momentum to pick up from now onwards. WCT has tendered for over RM12bn worth of contracts comprising RM9.5bn for infra and RM2.5bn for buildings. Should some chunky tenders come to fruition soon, management guided that FY17 job wins could surpass RM2bn.

• Top contender for LRT3. In terms of sizable jobs, we gather that WCT is one of the top contenders to secure a package of the LRT3 (RM9bn). Management shared that it has bid for 4 packages, each worth between RM800m and RM2bn.

• Vying for BRT. Management shared that it working in a JV with a foreign partner to bid for the KL-Klang BRT (RM2bn) which will be implemented via the Build-Operate-Transfer (BOT) method over a 30 year concession period. WCT will hold a majority stake while the foreign partner will largely be in charge of the consultancy aspect. The JV has already submitted to the Request for Proposal (RFP) on the project.

• Sales pick up at the expense of margin. WCT’s recent discounts offered on its properties have been bearing fruit with 2Q property sales at RM83m, picking up from RM49m in 1Q. Thus far into 3Q, sales have totalled RM53m. However, this has come at the expense of margin with EBIT level contracting YoY from 23.3% to 12.8% in 1H.

• Net gearing lowered. WCT’s net gearing has fallen to 86% in 2Q from 95% in 1Q. It will continue to focus on de-gearing via (i) REIT-ing its investment assets, (ii) clearing property inventories via discounts and (iii) Sg Buaya land disposal.

Risks

• Inconsistency in earnings delivery from quarter to quarter.

Forecasts

• Unchanged as we have already raised our forecast post 2Q results release.

Rating

Maintain 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 our BUY rating.

Valuation

• Our unchanged SOP based TP of RM2.26 implies FY17-18 P/E of 233x and 20x respectively. While this is rather steep, WCT has significant surplus land value (i.e. market value less BV), backing 63% of its market capitalisation.

Source: Hong Leong Investment Bank Research - 28 Aug 2017