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.24% of outstanding orderbook). Management is optimistic cost review and optimisation for their stretch is expected to be finalised by 1Q20.

Property development. WCT recorded RM197m of property sales YTD and unbilled sales currently stands at RM105m, implying a rather thin cover of 0.59x 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 RM845m (inclusive of JV project in Kelana Jaya).

Property investment. WCT REIT (RM1.2bn) is targeted to launch by mid-FY20. Premiere Hotel is fetching less than desired valuation delaying the launch. WCT aims to raise c.RM250m by floating 20-25% of the stake.

Perpetual sukuk. WCT recently issued two tranches of perpetual sukuk amounting to RM617m to partly retire part of its outstanding RM800m medium term notes (MTNs) due next year. The two tranches will carry a distribution rate of 5.8-6.0% and a non-call period of 5 and 7 years after which the rate escalates at 1.0% p.a. Post-issuance, WCT’s net gearing has improved to 0.65x from 0.99x. Based on 4.4% to 4.6% interest of current MTNs, we reckon c.27m of annual finance costs (against FY18:RM132m) will no longer be recognised on the P/L uplifting bottom-line. Nonetheless, we are not too sanguine on the issuance as we reckon amidst the positive cosmetics, total cash financing burden increases by c.RM9m which indicates to us efforts to de-gear is still be challenging.

Forecast. Increase FY19/20/21 earnings by 4.4%/8.2%/3.3% after accounting for perpetual sukuk.

Maintain SELL, TP: RM0.80. Maintain SELL rating with same SOP-driven TP of RM0.80 as we increase the discount to 40% (from 30%) applied to SOP value of RM1.34. We feel that the steep SOP discount is warranted given weaker construction outlook as well as higher cash financing burden. Our TP implies P/E of 15.8x for FY19, 12.3x for FY20 and 10.6x for FY21. Despite the healthy orderbook level, the persistent weakness of property market caused by oversupply issue presents major headwinds for its de-gearing initiatives.

Source: Hong Leong Investment Bank Research - 2 Dec 2019