WCT’s 1QFY20 core loss of -RM16m (against core earnings of RM21.2m in 4QFY19 and RM10.3m in 1QFY19) were below ours and consensus expectations. Weaker performance was due to lower contribution from all segments stemming from the MCO. WCT’s estimated outstanding orderbook stands at c.RM6.0bn translating into a healthy 4.8x cover. We remain cautious on its gearing moving forward as Covid-19 will have a durable impact on its retail & hospitality assets. Cut FY20-22 earnings by 8-46%. Maintain HOLD with SOP-driven TP of RM0.48. Our TP is derived from 40% discount on SOP value of RM0.78.

Below expectations. WCT reported 1QFY20 results with revenue of RM338.1m (- 27% QoQ, -26% YoY) and core loss of -RM16.0m (against core earnings of RM21.2m in 4QFY19 and RM10.3m in 1QFY19). We deem the results to be below expectations (we projected FY20 core earnings of RM71.4m; while consensus projected core earnings of RM85.1m). Note that our numbers have been adjusted for land sale gain of RM16m. No dividends were declared for the quarter (1QFY19: nil).

Deviations. The results shortfall was due to poorer than expected performance from all segments as a result of the MCO. The company saw limited construction works done during MCO (TRX and MRT2) while its retail, hospitality and property segments were shut.

QoQ. On a QoQ basis, WCT turned to core loss of -RM16.0m (vs. core earnings of RM21.2m in 4QFY19) as revenue declined by -27% dragged by minimal construction and property progress billings as well as lower contribution from property investment segment.

YoY. On a YoY basis, WCT’s core loss of -RM16.0m pales in comparison with its core earnings of RM10.3m registered in 1QFY19. Its construction segment experienced the steepest fall (EBIT declined -79% YoY) as a result of stop work order for most of its projects compounded by a downward revision in expected margins moving forward (from incurring fixed overheads during MCO and from implementing SOP measures).

Orderbook. WCT’s estimated outstanding orderbook stands at c.RM6bn translating into a healthy c.4.8x cover (based on FY19 construction revenue). Earlier this year, the company received a letter of award worth RM1.2b for the construction of Pavilion Damansara Heights Development- Parcel 2 which consists of 1 block of 32 storey office and hotel, 2 blocks of residential tower and also a MRT link bridge in Pavilion Damansara Heights. While the company has consistently boasted a tenderbook of c.RM5.8b, we are not too sanguine on its award conversion prospects in the near term. Given its healthy orderbook cover, we think that project execution will remain WCT’s key focus.

De-gearing updates. Company has so far issued a cumulative RM821m of perpetual sukuk to retire its RM800m MTN. According to management any further issuance will depend on the state of the capital markets (perpetual sukuk programme up to RM1b). At present, WCT has retired all but RM183m (earlier than scheduled) of the MTN which will be completely retired in Aug-20. Moving forward, its next major bond redemption amounts to RM100m due by 2HFY21. Other peripheral on-going measure is its land sales initiative in which FY19 brought sales value of only RM128m. We reckon WCT may fall short of meeting its land sales target of RM125m in FY20 given the uncertain environment. All in all, we remain cautious on its gearing (net gearing including perpetual: 0.98x) moving forward as Covid-19 will have a durable impact on its retail & hospitality assets increasing cash flow pressure

Source: Hong Leong Investment Bank Research - 2 Jul 2020