Highlights

• Sustainable recovery. WCT saw its construction EBIT margin for the 9M period recover YoY from 3.6% to 10.7% which was driven by the execution of newer jobs that command healthy margin as opposed to legacy jobs that plagued previously. Management expects this to be sustained into FY18 as its orderbook comprises mainly of infra jobs (92%) as opposed to buildings (8%), in which the former generates higher margin for WCT.

• Job wins centred on LRT3. WCT has managed to secure RM1.7bn worth of new job wins YTD, comprising 3 packages of the LRT3. With this, WCT’s orderbook now stands at a record high of RM5.7bn. This translates to a strong cover of 3.8x on FY16 construction revenue.

• More in the pipeline. Management feels that it could potentially end FY17 with RM2bn worth of new job wins, implying another c.RM300m worth of jobs could be on the cards before year end. We understand that this may consist of building jobs within the TRX area. For FY18, management guides for an orderbook replenishment of RM2bn on back of existing tenders of RM5bn. Potential jobs include the ECRL, Pan Borneo Sabah and developments from sister-cos Malton and Pavilion Group (RM1.5bn).

• Exiting Middle East. With its new management on board, WCT’s longer term plan is to exit the Middle East in view of an increasingly tough operating environment there. WCT only has 1 outstanding job in Qatar which makes up 9% of its orderbook. It also has an outstanding arbitration claim win of AED1.15bn (RM1.29bn) although management is still uncertain on how soon it can receive the proceeds.

• Efforts to reduce inventory. WCT’s discounts offered on its property inventories have been bearing fruit with 3Q and 2Q sales at RM96m and RM83m, picking up from RM49m in 1Q. However, this has come at the expense of property margin with EBIT level contracting YoY from 26.8% to 13.8%.

Risks

• High net gearing at 87% although initiatives such as private placement, REIT-ing and land disposal plans are in place.

Forecasts

• We raise our FY17 forecast by 4% after imputing higher construction margin but leave FY18-19 unchanged.

Rating

Maintain BUY, TP: RM2.29

• Albeit with a cautious stance, we are turning positive on WCT given its results recovery. Coupled with its 27% share price decline since mid-May, this leaves sufficient buffer to reinforce our BUY rating.

Valuation

• Our unchanged SOP based TP of RM2.29 implies FY17-18 P/E of 23.2x and 20x respectively.

• While this is rather steep, WCT has significant surplus land value (i.e. market value less BV), backing 69% of its market capitalisation.

Source: Hong Leong Investment Bank Research - 24 Nov 2017