WCT’s outstanding orderbook stands at c.RM5.4bn (3.7x cover). Construction margins were revised downwards for local jobs. WCT recorded RM28m of property sales and unbilled sales stands at RM109m (0.3x cover). Deterioration to occupancy rates are slowly showing. Cut FY21-22 earnings by 11-12%. Maintain HOLD with lower SOP-driven TP of RM0.44. While the stock trades at a low P/BV of 0.19x, in absence of any meaningful upside catalysts we reckon it is reflective of WCT’s uncertain prospects and fragile balance sheet.

Below Are the Key Takeaways From Yesterday’s Briefing:

Construction. WCT’s outstanding orderbook stands at c.RM5.4bn, translating to a healthy cover ratio of 3.7x. The orderbook was boosted by the award of Pavilion Damansara Phase 2 (RM1.2b) during the MCO. On a blended basis, management has revised downwards margin assumptions by 1% for local projects. Nonetheless, impact of the lockdown was masked by strong recognition from its Qatar project (RM140m topline) and upward margin revision; without this, losses would have widened further. Tenderbook remains largely the same with no job awards guided for the remainder of 2020.

LRT3. WCT’s outstanding LRT3 work package orderbook post-downsizing (based on management’s estimates) stands at RM602m (c.11% of outstanding orderbook). This is based on the assumption of c.30% reduction in original contract sum which we deem to be reasonable.

Property development. WCT recorded weak sales of RM28m in 2QFY20 but so far in 3QFY20, figures have rebounded to RM48m. Unbilled sales stands at RM109m representing a depleting 0.3x cover (decline due to recognition of Waltz Residences). WCT remains focused on clearing its completed inventory amounting to GDV of RM810m. In terms of land sales, none were recorded in 2QFY20. We reckon the uncertain environment is bound to impede significantly on landbanking activities.

Property investment. Occupancy rates at its retail malls (KLIA2, Subang Skypark and Paradigm JB) are showing signs of weakening in 2QFY20 vis a vis 1QFY20. Recall that full rental waivers were provided from 18 March to April with max rebate of 50% starting May (case by case). We see downside risks to occupancy rates at Paradigm JB (occupancy rate: 95%) given a substantial number of leases will expire at end-2020. Likewise, occupancy rates at KLIA2 (declined QoQ from 96% to 92%) may worsen with a bleak travel outlook. Things are similarly dreary for its hotels, where average occupancy rates dropped further to 10-20% from 29-32% previously.

Forecast. Cut FY21-22 earnings by 12.0% and 11.9% as we attempt to capture downward revision in lease income as earnings impact is spread evenly over remaining lease tenure.

Maintain HOLD, TP: RM0.44. Maintain HOLD with lower TP of RM0.44 (from RM0.47) post earnings adjustments. TP is derived based on 40% discount to SOP value of RM0.74. Our TP implies FY20/21/22 P/E of 16.3x/10.1x/8.2x. While the stock trades at a low P/BV of 0.19x, in absence of any meaningful upside catalysts we reckon it is reflective of WCT’s bleak prospects and fragile balance sheet

Source: Hong Leong Investment Bank Research - 28 Aug 2020