WCT’s 1HFY18 earnings of RM45.8m (-39% YoY) were below both our and consensus estimates. YTD core PATAMI decreased due to higher finance costs, higher depreciation charges and lower contribution from JVs and associates. WCT managed to secure RM550m worth of new jobs YTD. This brings its order book to c.RM5.0bn, translating into healthy 3.6x cover ratio on FY17 construction revenue. Cut FY18-20 earnings by 25-29% after taking into account higher finance costs and lower contribution from JVs. Downgrade to SELL with lower SOP-driven TP of RM0.67 (from RM0.78) following earnings cut and roll forward of valuation horizon from FY18 to FY19.

Below expectations. WCT reported 2QFY18 results with revenue of RM589.9m (+9% QoQ, +54% YoY) and core earnings of RM6.1m (-85% QoQ, -84% YoY). This brings 1HFY18 core earnings to RM45.8m, decreasing by 39% YoY. 1H core earnings accounted for 32% and 29% of HLIB and consensus full year forecast respectively, which is below expectations. The discrepancy between core and reported earnings (2Q18 reported PATAMI of RM43.8m) is mainly due to gain from land sales which amounted to c.RM35m from revenue of RM80m.

Deviations. This shocking below expectation results were mainly due to higher than expected finance costs and lower share of contribution from JVs and associates.

QoQ. Core PATAMI decreased by 85% mainly due to lower construction and property margins.

YoY. Core PATAMI decreased by 84% mainly due to lower construction and property margins, higher finance costs and higher depreciation charges.

YTD. Core PATAMI decreased by 39% due to higher finance costs, higher depreciation charges and lower contribution from JVs and associates.

Healthy orderbook level. WCT managed to secure RM550m worth of new jobs YTD. This brings its order book to c.RM5.0bn, translating into healthy 3.6x cover ratio on FY17 construction revenue.

LRT3. LRT3 project size has been scaled down and the timeline to complete has been extended from 2020 to 2024. WCT is negatively affected as the stations design and size for their LRT3 package (RM1.5bn) are under review and the work will not proceed as anticipated until the designs are confirmed. Moreover, the extension of completion timeline further delays the revenue recognition into later periods.

Forecast. Cut FY18-20 earnings forecast by 25%, 29% and 25% respectively after take into account higher finance costs and lower share of contribution from JVs.

Downgrade to SELL, TP: RM0.67. Downgrade to SELL rating with lower SOP-driven TP of RM0.67 (from RM0.78) following earnings cut but slightly offset by the roll forward of valuation horizon from FY18 to FY19. Despite the healthy orderbook level, the persistent weakness of property market and rising rate environment are major headwinds for its de-gearing initiatives. Moreover, ongoing infrastructure project reviews and cancellations further worsen the company construction segment prospect.

Source: Hong Leong Investment Bank Research - 28 Aug 2018