WCT reported 1QFY19 earnings of RM10m (against losses QoQ, -77% YoY) which were below our expectations and consensus. Core earnings are adjusted for land disposal revenue and gain of RM55m and RM30m respectively. The deviation was mainly due to lower than expected property development contribution and higher tax rate. WCT’s current orderbook stands at c.RM6bn which translates to a healthy cover of 3.2x on FY18 construction revenue. 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 at RM1.0bn. Cut FY19-20 earnings by 3-6%. Maintain SELL with lower TP of RM0.50 (from RM0.51). 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 in the property market is a major headwind for its de gearing initiatives.

Below expectations. WCT reported 1QFY19 results with revenue of RM459.6m (- 38% QoQ, -15% YoY) and adjusted core earnings of RM10.3m (against losses QoQ, - 74% YoY). The latter made up 15% of our full year forecast (consensus: 9%) which is below expectations. Core earnings are adjusted for land disposal revenue and gain of RM55m and RM30m respectively. The deviation was mainly due to lower than expected property development contribution and higher tax rate.

QoQ. Core PATAMI turned profitable (versus RM10.8m losses in 4Q18) mainly due to higher contribution from all divisions.

YoY. Core PATAMI plunged -74% mainly due to lower construction profit, partially offset by higher contribution from property investment division.

Healthy orderbook level. WCT’s current orderbook stands at c.RM6bn which translates to a healthy cover of 3.2x on FY18 construction revenue. 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 at RM1.0bn.

LRT3. LRT3 project size has been scaled down and the timeline to completion has been extended from 2020 to 2024. WCT’s outstanding LRT3 work package orderbook stands at RM1.36bn (c.21% of outstanding orderbook) and we understand that 10- 15% of orderbook value is subject for reduction after taking into account downsizing of project and shelving of one station.

Forecast. In view of the lower than expected results, we cut FY19-20 earnings by - 3.2% and -6.4% respectively after factoring in lower property development contribution and higher tax rates. We introduce our FY21 earnings forecast of RM97.3m.

Maintain SELL, TP: RM0.50. Maintain SELL rating with lower SOP-driven TP of RM0.50 (from RM0.51). 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 its healthy orderbook level, we reckon that the weakness in the property market could derail its de-gearing plans.

Source: Hong Leong Investment Bank Research - 3 Jun 2019