WCT’s 9MFY18 earnings of RM51.1m (-87% 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 RM2.3bn worth of new jobs YTD. This brings its order book to c.RM6.0bn, translating into healthy 4.3x cover ratio on FY17 construction revenue. Cut FY18-20 earnings by 34-39% after taking into account higher finance costs, higher depreciation charges and lower property development revenue. Maintain SELL with lower SOP-driven TP of RM0.53 (from RM0.71) following earnings cut.

Below expectations. WCT reported 3QFY18 results with revenue of RM385.8m (- 35% QoQ, -18% YoY) and core earnings of RM5.3m (-13% QoQ, -87% YoY). This brings 9MFY18 core earnings to RM51.1m, decreasing by 56% YoY. 9M core earnings accounted for 46% and 35% of HLIB and consensus full year forecast respectively, which is below expectations.

Deviations. Results were below expectations mainly due to higher than expected finance costs and lower contribution from property development.

QoQ/ YoY. Core PATAMI decreased by 13% and 87% respectively mainly due to lower contribution from both construction and property development segments, partially offset by higher contribution from property investment division.

YTD. Core PATAMI decreased by 56% due to higher finance costs, higher depreciation charges and lower contribution from JVs and associates.

Healthy orderbook level. WCT managed to secure RM2.3bn worth of new jobs YTD. This brings its order book to c.RM6.0bn, translating into healthy 4.3x cover ratio on FY17 construction revenue.

LRT3. LRT3 project size has been scaled down and the timeline to completion 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 34.1%, 39.1% and 36.8% respectively after take into account higher finance costs, higher depreciation charges and lower property development revenue.

Maintain SELL, TP: RM0.53. Maintain SELL rating with lower SOP-driven TP of RM0.53 (from RM0.71) following earnings cut. 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 - 27 Nov 2018