WCT’s 9MFY20 core loss of –RM4.2m were below ours and consensus expectations. Weaker performance was due to distribution to Perpetual sukuk holders. Operating performance rebounded on the back of stronger construction billings. WCT’s estimated outstanding orderbook stands at c.RM5.1bn translating into a healthy 4.1x cover. Management warned of possible impairments going forward due to Covid-19. Slash FY20-22 earnings by 12-74%. Maintain HOLD rating with SOP-driven TP of RM0.42. Our TP is derived from 40% discount on SOP value of RM0.70.

Below expectations. WCT reported 3QFY20 results with revenue of RM423.4m (+13% QoQ, +15% YoY) and core earnings of RM2.7m (-70% QoQ, -89% YoY). This brings 9MFY20 core loss to -RM4.2m (against core earnings of RM57.9m in 9MFY19). The results fell below both ours and consensus expectations (we projected FY20 core earnings of RM36.9m; while consensus projected core earnings of RM35.2m).

Deviations. The results shortfall was largely due to distribution to perpetual sukuk holders amounting to RM24.4m.

Dividends. No dividends were declared for the quarter (9MFY20: nil; 9MFY19: nil).

QoQ/YoY. QoQ and YoY core PATAMI declined by -70% and -89% during the quarter mainly due to perpetual sukuk distribution. Operating profit rebounded by 67% QoQ and 10% YoY driven by construction segments which chalked up revenue increase (+11% QoQ, +15% YoY) as pace of billings continue to normalise. This is also compounded by the Pavillion DH project approaching stronger billings cycle.

YTD. WCT slipped into core loss of -RM4.2m from core earnings of RM57.9m in 9MFY19. This was in tandem with revenue decline of -11% as lower contribution from construction (-18%) and property investment (-15%) more than offset increase in property revenue (+3%) which was boosted by handover of Waltz Residences in 2QFY20.

Orderbook. WCT’s estimated outstanding orderbook stands at c.RM5.1bn translating into a healthy c.4.1x cover (based on FY19 construction revenue). Earlier this year, the company received a letter of award worth RM1.2bn for the construction of Pavillion DH 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. Going forward, we do not anticipate substantial job wins given a stretched balance sheet but a healthy orderbook does negate the need for replenishment.

Possible impairments. Along with the results release, managements did warn of possible impairment to WCT’s value of assets including properties, investment properties, inventory properties under development and completed inventory properties. Given that some contractors have recognised impairments due to the pandemic, we do not view this as surprising.

Forecast. Slash FY20-22 earnings by -74.0/-12.0/-16.2% after factoring in distribution to perpertual sukuk holders.

Maintain HOLD, TP: RM0.42. Maintain HOLD with lower TP of RM0.42 (from RM0.44). TP is derived based on a 40% discount to SOP value of RM0.70. Our TP implies FY20/21/22 P/E of 59.7x/10.9x/9.3x. While the stock trades at a low P/BV of 0.19x, we reckon it is reflective of WCT’s weak earnings prospects and fragile balance sheet.

Source: Hong Leong Investment Bank Research - 26 Nov 2020