WCT’s 1HFY20 core loss of –RM6.9m (against core loss of RM16.0m in 1QFY20, -12% YoY) were within ours and consensus expectations. Weaker performance was due to lower contribution from construction and property investment stemming from the MCO. WCT’s estimated outstanding orderbook stands at c.RM5.0bn translating into a healthy 4.0x cover. We remain cautious on its gearing moving forward as Covid-19 will have a durable impact on its retail & hospitality assets. Maintain forecasts and HOLD rating with SOP-driven TP of RM0.47. Our TP is derived from 40% discount on SOP value of RM0.78.

Inline. WCT reported 2QFY20 results with revenue of RM375.0m (+11% QoQ, -17% YoY) and core earnings of RM9.1m (against core loss of -RM16.0m in 1QFY20, -12% YoY). This brings 1HFY20 core loss to -RM6.9m. We deem the results to be within expectations in anticipation of a 2H recovery (we projected FY20 core earnings of RM38.6m; while consensus projected core earnings of RM32.4m).

Dividends. No dividends were declared for the quarter (1HFY19: nil).

QoQ. On a QoQ basis, WCT returned to the black with core earnings of RM9.1m (vs. core loss of -RM16.0m in 1QFY20) as revenue rebounded by 11%. This was achieved on the back of stronger property segment revenue (+42%) as Waltz Residences was handed over during the quarter. 1QFY20 also saw depressed earnings due to the distribution to perpetual sukuk holders.

YoY. On a YoY basis, WCT’s core earnings declined by -60%. Main culprit was revenue decline of -18% where construction revenue declined by 23%. This was due to 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).

YTD. WCT slipped into core loss of -RM6.9m from core earnings of RM33.0m in 1HFY19. This was in tandem with revenue decline of -22% as lower contribution from construction (-30%) and property investment (-14%) more than offset increase in property revenue.

Orderbook. WCT’s estimated outstanding orderbook stands at over RM5.0bn translating into a healthy c.4.0x 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. Given its healthy orderbook cover, we think that project execution will remain WCT’s key focus.

De-gearing updates. At present, WCT has retired all but RM183m (earlier than scheduled) of its 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 as Covid-19 will have a durable impact on its retail & hospitality assets increasing cash flow pressure.

Forecast. Maintain forecasts as earnings are inline.

Maintain HOLD, TP: RM0.47. Maintain HOLD with unchanged TP of RM0.47. TP is derived based on 40% discount to SOP value of RM0.78. Our TP implies FY20/21/22 P/E of 17.2x/9.3x/7.6x. While the stock trades at a low P/BV of 0.18x, we reckon it is reflective of WCT’s weak earnings prospects and fragile balance sheet.

Source: Hong Leong Investment Bank Research - 27 Aug 2020