WCT’s outstanding orderbook currently stands at c.RM6.0bn (4.0x cover). Construction margins were revised downwards for infra jobs. Current pace of works are c.50% of its normalised operating capacity. WCT recorded RM120m of property sales and unbilled sales currently stands at RM177m (0.5x cover). No property launches are planned for 2020. Rebates will be given (up to 50%) to sustain its occupancy rates at malls. Maintain HOLD with unchanged SOP-driven TP of RM0.47. Despite the poor earnings outlook, this is largely priced-in, trading at 0.22x P/BV.

Below Are the Key Takeaways From Last Friday’s Briefing:

Construction. WCT’s outstanding orderbook currently stands at c.RM6.0bn, translating to a healthy cover ratio of 4.0x. The orderbook was boosted by the award of Pavilion Damansara Phase 2 (RM1.2b) during the MCO. PDH phase 1 and 2 contracts now account for 48% of the group’s total orderbook. Management estimates that c.90% of all foreign workers required (including subcon) have been screened for Covid-19 and current pace of works are c.50% of its normalised operating capacity. Its construction margins in 1QFY20 contracted by 5.9ppts YoY to 2.9% as a result of downward margin revision for selected infra works to account for fixed overheads incurred and delay costs. On building side, management is maintaining its margin guidance whereby progress of works has largely kept up with the scheduled timeline.

LRT3. WCT’s outstanding LRT3 work package orderbook post-downsizing (based on management’s estimates) stands at RM837m (c.14% of outstanding orderbook). Pace of works have been slow pending finalisation of the novated agreement.

Property development. WCT recorded sales of RM120m in 1QFY20 with RM131m achieved YTD. Unbilled sales stands at RM177m representing a thin 0.5x cover. Upon the MCO, a significant amount of its bookings (RM59 YTD) were delayed or cancelled. WCT’s focus will remain on clearing its completed inventory amounting to GDV of RM742m (inclusive of JV project in Kelana Jaya), up from RM738m in 4Q19. Going forward, management is delaying the planned launch of The Maple, originally slated for 3Q20 with no planned launches for 2020. In terms of land sales, no transactions are expected in 2QFY20 with full year target in the midst of revision. We reckon the uncertain environment is bound to impede significantly on landbanking activities.

Property investment. Occupancy rates remained rather healthy in 1QFY20 with most unchanged. Nonetheless, we take note that the quarter only reflects 2 weeks of MCO where we see things worsening in subsequent months. WCT provided full rental waivers for tenants (non-essential) from 18 March to April. In order to maintain occupancy rates above 90% going forward, management will consider max rebate of 50% on a case by case basis starting May. We see downside risks to occupancy rates at Paradigm JB (occupancy rate: 96%) as we understand a substantial number of leases will be up for renewal in end-2020. Things are substantially bleaker for its hotels, where average occupancy rates dropped to c.30% from c.50-60% previously. Entering the RMCO, occupancy is hovering at 10%. We think a return to normalcy is some way off and may hinge on a vaccine materialising.

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. 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.

Forecast. Maintained as the briefing yielded no surprises.

Maintain HOLD, TP: RM0.47. We remain concerned on its gearing as well as future earnings profile underpinned by its exposure to retail and hospitality segments. This is largely offset by its lower-end valuations at a measly 0.22x P/BV. Given this, maintain HOLD rating with unchanged SOP-driven TP (40% discount) of RM0.47. Our TP implies FY20/21/22 P/E of 17.2x/9.3x/7.6x.

Source: Hong Leong Investment Bank Research - 6 Jul 2020