Management guided that construction margin would shrink going forward after existing building jobs progress into advance stages as the margin for those jobs are lower than that of infrastructure jobs. Cost review of LRT3’s station works is still undergoing and outcome is expected to be known in 2H19. WCT recorded RM33m of property sales YTD and unbilled sales currently stands at RM116m, imply a rather thin cover of 0.66x FY18 property revenue. Unbilled sales are mainly from Waltz Residences project which is expected to be completed in 2Q20. Advisor has been appointed for listing of WCT REIT and is looking to launch earliest by end of FY19 with associated asset value of RM1.5bn. Maintained forecast. Maintain SELL rating with unchanged SOP driven TP of RM0.50. (50% discount on SOP)

We attended WCT’s results briefing and walked away feeling neutral. Below are the key takeaways.

Construction. WCT’s outstanding orderbook currently stands at c.RM6bn, translating to a healthy cover of 3.2x cover on FY18 construction revenue. 56% of current orderbook consists of infrastructure jobs with the balance made up by building jobs. Management guided that construction margin would shrink going forward after existing building jobs progress into advance stages as the margin for those jobs are lower than that of infrastructure jobs. Given the substantial amount of jobs secured last year (RM2.67bn), focus will be on execution of current jobs on hand and hence FY19 orderbook replenishment target is much lesser and is set at RM1.0bn.

LRT3. LRT3 project size has been scaled down and the timeline to complete has been extended from 2020 to 2024. WCT’s outstanding LRT3 work package orderbook stands at RM1.34bn (c.22% of outstanding orderbook). Cost review is still undergoing and outcome is expected to be known in 2H19.

Property development. WCT recorded RM33m of property sales YTD and unbilled sales currently stands at RM116m, implying a rather thin cover of 0.66x FY18 property revenue. Unbilled sales are mainly from Waltz Residences project which is expected to be completed in 2Q20. WCT’s focus will remain on clearing its completed inventory amounted to GDV of RM918m (inclusive of JV project in Kelana Jaya) or book value of c.RM600m.

Property investment and REIT plan. WCT REIT is planned to launch earliest by end of FY19 with associated asset value up to RM1.5bn. Valuation of the assets has completed and advisor has been appointed. Target capital structure of the REIT is 30% debt with the balance make up by equity. The company aims to float 20-25% of the stake and raise c.RM250m.

De-gearing initiatives. We understand that the company is actively negotiating with potential buyers on disposal of Sg Buaya land with current market value of RM300m. Separately, RM70-80m land sales in Klang is expected to conclude in this year with gain of 30-40%.

Forecast. Unchanged as the briefing yielded no surprises.

Maintain SELL, TP: RM0.50. Maintain SELL rating with unchanged SOP -driven TP of RM0.50. Our TP is derived from 50% discount on SOP value of RM1.00. Our TP implies P/E of 10.6x for FY19, 8.5x for FY20 and 7.2x for FY21. Despite the healthy orderbook level, the persistent weakness of property market caused by oversupply issue is major headwinds for its de-gearing initiatives.

Source: Hong Leong Investment Bank Research - 29 May 2019