WCT’s 1QFY18 core earnings of RM40m (+67% QoQ, +7% YoY) were within our expectations and consensus. Orderbook level of RM5bn implies a strong cover ratio of 3.9x. Nonetheless, we have turned cautious on the macro job flow outlook given the mega project reviews by the new administration post GE14. This prompts us to lower new job wins target which reduces FY18-19 by 8% and 6%. SOP based TP is cut from RM1.81 to RM1.09 but maintain BUY rating. WCT’s share price is now at a level last seen in 2009, i.e. during the GFC.

Within expectations. WCT reported 1QFY18 results with revenue of RM539.8m (-7% QoQ, +14% YoY) and core earnings of RM39.8m (+67% QoQ, +7% YoY). The latter formed 25% of our full year forecast and consensus which is within expectations.

Construction delivers but... 1Q construction revenue sustained QoQ (-4%) and grew healthily YoY (+16%) as orderbook execution gained traction. EBIT rose by a much stronger 81% QoQ and 97% YoY as margin almost doubled to 13.3% in 1Q. We estimate WCT’s orderbook to stand at RM5bn (as of end 1Q), translating to a strong cover of 3.9x on FY17 construction revenue.

...cautious on job flow outlook. Following the change in government post GE14, we have turned cautious on the overall macro job flow outlook for the construction sector. The new administration has stated that it will put all mega projects under review to ensure that the terms are fair to the government and country. We feel that this will result to project award delays (as they are reviewed) or in the worst case, an outright cancellation.

Property performs worse off. The property segment saw 1Q revenue and EBIT fall 25% YoY and 23% QoQ. This is unsurprising considering its thin unbilled sales of RM230m as of end FY17, implying a cover ratio of only 0.53x. Going forward, management targets for RM300m sales for FY18 with its focus on reducing completed inventory (RM550m as of end FY17) by offering discounts and incentives.

Forecast. Although the results were inline, our overall cautious tone on the construction sector prompts us to reduce FY18-19 annual new job wins target from RM1bn to RM500m, lowering FY18-19 earnings by 8% and 6% respectively.

Maintain BUY but lower TP to RM1.09. Apart from the lower earnings, we also adjust some of our SOP valuation parameters, namely (i) cut P/E target from 14x to 10x to reflect the uncertain job flow outlook, (ii) increase the cap rate for its investment properties inline with the overall rising yield for REITs and (iii) widen SOP discount from 20% to 30% given lower risk appetite for construction plays post GE14. All in all, our SOP based TP is cut from RM1.81 to RM1.09.

Share price back to GFC days. Whilst we acknowledge the increased risk from an uncertain macro job flow outlook coupled with high net gearing (1QFY18: 95%), we believe this has already been reflected by its 51% share price decline YTD. Now trading at FY18-19 P/E of 7.8x and 6.9x, WCT’s share price is now back to the level last seen in 2009, i.e. during the Global Financial Crisis.

Source: Hong Leong Investment Bank Research - 24 May 2018