Pavilion Damansara Heights Phase 2 contract with estimated contract value of RM1bn is expected to be finalized within 2-3 months and works are expected to commence in 2H20. The contract is expected to command a pre -tax margin of 5- 6%. Cost review of LRT3’s station works is still ongoing and the project is expected to be back to full swing by FY20 (as opposed to previous guidance of mid-FY19). WCT recorded RM107m of property sales YTD and unbilled sales currently stands at RM108m, implying a rather thin cover of 0.61x on FY18 property revenue. Maintained forecast and SELL rating but with higher SOP driven TP of RM0.70 (from RM0.50) as we reduce the discount to 30% (from 50%) applied to SOP value of RM1.00.

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.RM5.9bn, translating to a healthy cover of 3.1x cover on FY18 construction revenue. The outstanding orderbook does not include the Pavilion Damansara Heights Phase 2 contract with estimated contract value of RM1bn. The award is expected to be finalized within 2-3 months and works are expected to commence in 2H20. The contract is expected to command a pre-tax margin of 5-6%.

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 RM1.33bn (c.22% of outstanding orderbook). Cost review is still ongoing and the project is expected to be back to full swing by FY20 (as opposed to previous guidance of mid-FY19).

Property development. WCT recorded RM107m of property sales YTD and unbilled sales currently stands at RM108m, implying a rather thin cover of 0.61x 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 amounting to GDV of RM879m (inclusive of JV project in Kelana Jaya).

Property investment and REIT plan. WCT REIT is targeted to launch by mid-FY20 with associated asset value up to RM1.2bn (against RM1.5bn as guided previously). This is because of the exclusion of New World Hotel asset due to its less than desired valuation. Target capital structure of the REIT is 30% debt with the balance made up by equity. The company aims to float 20-25% of the stake and raise c.RM250m.

Perpetual securities option. WCT is also looking to launch perpetual securities amounting to RM1bn in the near term in order to refinance the RM800m medium term notes (MTNs) that are repayable in a year’s time. The interest costs of the perpetual securities are estimated at 6% (against 4.2-4.6% interest of current MTNs).

Forecast. Unchanged as the briefing yielded no major surprises.

Maintain SELL, TP: RM0.70. Maintain SELL rating but with higher SOP-driven TP of RM0.70 (from RM0.50) as we reduce the discount to 30% (from 50%) applied to SOP value of RM1.00. We feel that the steep SOP discount previously may not be warranted anymore given that our FY19 orderbook replenishment target would be exceeded once the Pavilion Phase 2 contract is finalized in the near term. Our TP implies P/E of 15.1x for FY19, 11.9x for FY20 and 10.1x 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 Aug 2019