WCT’s PDH project was hit by Covid-19 rendering the site shut for cleaning and disinfection works. Outstanding contract value for PDH phase 1 and phase 2 constitute approximately 30% and 22% of WCT’s outstanding orderbook. Estimated phase 1 revenue contribution is 4% and 12% of total group revenue in FY19 and 1H20. We anticipate lower productivity levels post-resumption due to possible challenges in labour remobilisation. Cut FY20-22 earnings by -1 to -4%. Maintain HOLD with unchanged TP of RM0.44. Our TP implies FY20/21/22 P/E of 17.0x/10.2x/8.2x. The stock trades at a fair P/BV of 0.19x which should limit downside risks but reflective of WCT’s less than sanguine prospects and fragile balance sheet.

NEWSBREAK

Damanlela construction site cluster as reported by MoH over the past week is in relation to the Pavilion Damansara Heights (PDH) project situated at Jalan Damanlela, KL. At the onset (7-Nov), 15 positive cases were reported having tested 292 individuals and another 8 pending results. The cluster has since ballooned, culminating in 460 new cases yesterday bringing the cluster to a cumulative 747 active cases. WCT was appointed main contractor for Phase 1 in Sept 2018 (total contract sum: RM1.8bn) and Phase 2 in March 2020 (total contract sum: RM1.2bn).

According to WCT, initial positive cases were identified upon undertaking proactive and preventive Covid-19 testing which found cases among their staff, subcontractors, foreign workers and consultants. The affected personnel are undergoing treatment and warded/quarantined at a government hospital.

HLIB’s VIEW

Impact. Outstanding contract value for PDH phase 1 (RM1.6bn) and phase 2 (RM1.2bn) constitute approximately 30% and 22% of WCT’s outstanding orderbook respectively. Based on our estimation, phase 1 has so far contributed around 4% and 12% of total group revenue in FY19 and 1H20 respectively. Nonetheless, on the operating profit level, we estimate contribution to be roughly 1-3% given the lower margin for construction. Phase 2 has so far yet to contribute meaningfully with works scheduled to have started only in May 2020.

Site shutdown. The construction site is currently shut for disinfection and sanitisation process in adherence to the MoH’s guidelines. Based on previous guidance, the site shutdown could last a minimum 14 days for the cleaning process. Thereafter, resumption of works will be dependent on MoH’s discretion. We anticipate lower productivity levels post-resumption due to possible challenges in labour remobilisation.

Forecast. Cut FY20-22 earnings by -4.4%, -1.5% and -1.2% as we adjust downwards construction progress and margins as well as adjusting for impact of CMCO on its hospitality assets.

Maintain HOLD, TP: RM0.44. Maintain HOLD with unchanged TP of RM0.44 as our valuations are anchored on FY21 forecasts. TP is derived based on 40% discount to SOP value of RM0.74. Our TP implies FY20/21/22 P/E of 17.0x/10.2x/8.2x. The stock trades at a fair P/BV of 0.19x which should limit downside risks but reflective of less than sanguine prospects and fragile balance sheet.

Source: Hong Leong Investment Bank Research - 16 Nov 2020