WCT’s 1H18 results were below expectations mainly due to expensing of Paradigm JB interest charges and low occupancy rate of New World Hotel. The exact impact of LRT3 scaling down is hard to ascertain at this juncture but we understand that the initial estimate should be c.RM250m which is about 5% of its outstanding orderbook (RM5.3bn). De-gearing initiatives such as private placement and REIT may be postponed to next year due to unfavourable capital market. Maintained forecast and SELL rating with unchanged SOP-driven TP of RM0.67. 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 construction segment’s prospect.

Dampened by higher finance costs. WCT’s 1H18 finance costs more than doubled as interest charges parked under Paradigm Mall Johor Bahru development costs can no longer be capitalised since the mall has opened and also due to consolidation of Subang Skypark debt.

Lower contribution from JVs. JV contribution turned negative YTD mainly due to pre-opening costs of New World Hotel and low occupancy rate at 41%. We expect the operation to breakeven in near term after gestation period.

LRT3 cost review. LRT3 project size has been scaled down and the timeline to complete has been extended from 2020 to 2024. The exact impact to WCT orderbook is hard to be ascertained at this juncture but we gather that the initial estimate of affected orderbook amount should be c.RM250m which is about 5% of its outstanding order book (RM5.3bn).

Sluggish property sales. WCT recorded RM73m of property sales YTD with an additional RM32m pending SPA. Unbilled sales of RM161m imply a rather thin cover of 0.36x FY17 property revenue. WCT’s focus will remain on clearing its completed inventory which stands at RM603m. Discounts and incentives are being offered to push this. Come 3Q, WCT will have an additional RM250m to its property inventory with the completion of Sapphire Residence (Paradigm PJ) which will only be sold upon completion (registrations are now open).

De-gearing hits a snag. While WCT’s de-gearing plans are still on the cards (1QFY18 net gearing: 97%), we feel that some of these initiatives may have hit a temporary snag. The proposed 10% private placement is unlikely to proceed in the near term due to weak share price. For its REIT proposal, we understand that it will be postpone to next year due to (i) rising yields for REITs, (ii) AEON lawsuit for BBT Mall and (iii) awaiting for better rental numbers for Paradigm JB to eventually be included into the REIT.

Forecast. Unchanged as the briefing yielded no surprises.

Maintain SELL, TP: RM0.67. Maintain SELL rating with unchanged SOP-driven TP of RM0.67. 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 - 29 Aug 2018