WCT has accepted a letter of award for the superstructure works of Phase 2, Pavilion Damansara Heights worth RM1.2b with an estimated construction period lasting 42 months to commence in May-2020. WCT’s estimated outstanding orderbook increases to c.RM6.2bn which should last approximately 3-4 years. We take this opportunity to cut FY20-21 earnings by 31.5% and 3.6% after cutting contribution from its retail and hospitality assets. Upgrade to HOLD (from Sell) with lower SOP-driven TP of RM0.27 (from RM0.38) after earnings forecast adjustment. While we remain concerned on WCT’s balance sheet risks amidst a cloudy sector outlook, the steep share price correction (3 months: -72%) may have baked in the negative outlook. The stock cu rrently trades at an all-time low P/B of 0.11x.

NEWSBREAK

Pavilion job. WCT has accepted a letter of award from Jendela Mayang Sdn Bhd for the superstructure works of Phase 2, Pavilion Damansara Heights. The scope of works encompasses completion of 1 block of 32 storey office and hotel on a podium block comprising retail space, mezzanine floors and works to lower ground floor and basement car park, 2 blocks of residential tower, hard and soft landscape works and external works, including road and drainage, water reticulation, sewerage and a MRT link bridge. Contract value amounts to RM1.2bn with an estimated construction period lasting 42 months to commence in May-2020.

HLIB’S VIEW

Within expectations. WCT had previously announced in Aug-19 the acceptance of the Letter of Intent from Jendela Mayang regarding the project with award upon finalisation of terms between both parties. The project value was slightly higher than the company’s guidance of RM1bn.

Orderbook. WCT’s estimated outstanding orderbook increases to c.RM6.2bn which should last approximately 3-4 years. Going forward, we are not too sanguine on WCT’s replenishment prospects due to increasingly difficult tender environment driven by potential delays in infra jobs (change in government) and limited fiscal flexibility (oil price collapse) in rolling out new sizable infra jobs.

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 (targeting by mid-2020) to significantly bring down its gearing. Other peripheral on-going measure is its land sale initiative in which FY19 brought sales value of only 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 would further delay its REIT monetisation.

Forecast. Despite the contract award, we slash FY20-21 earnings by 31.5% and 3.6% as we take this opportunity to reduce contribution from its retail and hospitality assets (from Covid-19). We introduce FY22 core earnings forecast of RM94.8m.

Upgrade to HOLD, TP: RM0.27. Following the earnings cut, our SOP derived TP is lowered from RM0.38 to RM0.27. Nonetheless, we upgrade our rating from Sell to HOLD. While we remain concerned on WCT’s balance sheet risks amidst a cloudy sector outlook, the recent steep share price fall (3 months: -72%) may have baked in its negative outlook. Stock currently trades at an all-time low P/B of 0.11x.

Source: Hong Leong Investment Bank Research - 20 Mar 2020