WCT’s outstanding orderbook currently stands at c.RM5.0bn (2.8x cover). The outstanding orderbook does not include the PDH Phase 2 (RM1bn). Management guided that due to slow work progress for infra jobs, extensions are likely to be made to their respective completion dates. WCT recorded RM322m of property sales and unbilled sales currently stands at RM185m (0.53x cover). Maintain SELL with unchanged SOP-driven TP of RM0.65, derived from 40% discount on SOP value of RM1.08. Despite the positive results surprise, we remain concerned on its limited de-gearing options.

Below Are the Key Takeaways From Yesterday’s Briefing.

Construction. WCT’s outstanding orderbook currently stands at c.RM5.0bn, translating to a depleting cover ratio of 2.8x. The outstanding orderbook does not include the Pavilion Damansara Phase 2 (RM1bn) in which management expects to be finalised by 1Q20. Management guided that due to slow work progress for infra jobs, extensions are likely to be made to their respective completion dates. Affected projects include PBH Sarawak (RM532m), WCE (RM147m), Bangsar-Damansara highway (RM148m) and LRT3 (RM855 pre-downsize) with timeline extensions on average of 6- 12 months. On the building side, retail malls for TRX and PNB118 may see further extensions as a result of slow handover. Tenderbook stands at RM5.8b with 62% being building jobs.

LRT3. WCT’s outstanding LRT3 work package orderbook pre-downsizing stands at RM855m (c.17% of outstanding orderbook). Management is optimistic that cost review and optimisation for their stretch is expected to be finalised by 1Q20.

Property development. WCT recorded RM322m of property sales (RM107m from completed inventory) and unbilled sales currently stands at RM185m, implying a rather thin cover of 0.53x FY19 property revenue. WCT’s focus will remain on clearing its completed inventory amounting to GDV of RM738m (inclusive of JV project in Kelana Jaya) from RM845m in 3Q19. Management targets sale of RM200m of unsold inventory in FY20 (to date achieved RM13m). On-going projects include Paradigm Residences JB (launched in Sept 2019) with a current take-up rate of 57%. Management expects to launch The Maple, OUG (GDV: RM930m) in 3Q20.

Property investment. Occupancy rates were relatively healthy in FY19 across its assets. Nonetheless, the group has seen a 10-15% drop in footfall at KLIA2 following Covid-19. WCT REIT (RM1.2bn) is targeted to launch by 2H20. Premiere Hotel is fetching less than desired valuation delaying the launch; this may be further impacted by the recent Covid-19 outbreak. WCT aims to raise c.RM250m by floating 20-25% of the stake.

De-gearing. WCT has recently exhausted its proposed private placement leaving little room to manoeuvre for its de-gearing exercise. We reckon the failure to place shares emanates from rather unattractive valuations to the management. In our view, this leaves the company with only the REIT option to significantly bring down its gearing (currently 0.95x net gearing including perpetual sukuk). Other peripheral on-going measure is its land sale initiative in which FY19 brought sales value of RM110m. Overall, efforts to deleverage remains challenging unless the REIT option can be accelerated. We reckon its retail and hospitality related assets may be affected by Covid-19 which may further delay its REIT monetisation

Forecast. Maintain as the briefing yielded no surprises.

Maintain SELL, TP: RM0.65. We remain concerned on its limited de-gearing options as elaborated above and challenging tender environment. Maintain SELL rating with unchanged SOP-driven TP (40% discount) of RM0.65 (already lowered during results from RM0.80). Our TP implies P/E of 8.8x for FY20 and 10.0x for FY21.

Source: Hong Leong Investment Bank Research - 28 Feb 2020