WCT’s blended property investment occupancy rates are likely to deteriorate further without recovery in international travel. WCT aims to launch RM1.2bn GDV of property projects and targets an aggressive sales figure of RM800m-1bn in FY21 to offset weakness in other segments. Its construction arm is expected to get busier on the tendering front next year due to Budget-21 but near term earnings remain challenging. Increase FY21-22 earnings by 8.7% and 2.9%. Maintain HOLD with same SOP-driven TP of RM0.42. While the stock trades at a low P/BV of 0.19x, we reckon it is reflective of WCT’s volatile earnings and fragile balance sheet.

Below are the key takeaways from yesterday’s briefing:

Construction. WCT’s outstanding orderbook stands at c.RM5.1bn, translating to a healthy cover ratio of 4.1x. The orderbook was boosted by the award of Pavilion Damansara Phase 2 (RM1.2bn) during the MCO. 3QFY20 saw EBIT margins spike (12.4%) but was guided to be unsustainable and should revert to single digits moving forward. We note that 31% of its construction revenue (3QFY20) was derived from PDH-phase 1 which would see roughly 2 week disruption in 4QFY20 resulting from the Covid-19 Damanlela cluster there. The site has since reopened with minimal works done (maintenance etc). In terms of tender prospects, WCT anticipates a busier year in FY21 due to an expansionary Budget 2021. As such, tenderbook is bound to expand on the back of numerous projects receiving budget allocations (PBH Sabah, CSR, various bridges).

LRT3. Finalisation of LRT3 agreements are close to concluding, pending final paperwork. Outstanding orderbook from the project stands at RM587m (11%) based on current estimates. We believe the final figure will not differ materially given advance stages of discussions with turnkey contractor.

Property development. WCT’s property sales saw a rebound to RM93m in 3QFY20 from RM26m in 2QFY20. Nonetheless, sales momentum has tapered slightly to RM37m in 4QFY20 (as at 8-Nov) possibly due to reintroduction of CMCO. Unbilled sales stands at RM108m representing a depleting 0.3x cover with RM147m worth of pending SPAs. WCT’s completed unsold inventory stands at RM796m slightly lower than RM810m in 2QFY20 as some property stock in Klang was cleared. WCT remains focused on achieving its FY20 land sale target of RM125m (RM25m achieved YTD) but recognition in our view could only come in FY21. For FY21, WCT aims to launch projects with a cumulative GDV of RM1.2bn and is guiding for an aggressive sales target of RM800-1bn (ex. land sales), which we reckon is an uphill task.

Property investment. Overall, management sees a possible drop of 1% in average occupancy rates to c.93% by year end. Projected decline is largely driven by Gateway (91% to 88%) and Paradigm JB (95% to 92%). Declines will be partially offset by improvements at Paradigm PJ (96% to 99%). Unless borders reopen, we see further downside to occupancy rates at Gateway and Paradigm JB. Meanwhile, things are similarly dreary for its hotels, where average occupancy rates dropped to single digits during the current CMCO.

Forecast. Increase FY21-22 earnings by 8.7% and 2.9% after imputing higher FY21 property sales figure.

Maintain HOLD, TP: RM0.42. Maintain HOLD with same TP of RM0.42. TP is derived based on a 40% discount to SOP value of RM0.70. Our TP implies FY20/21/22 P/E of 59.4x/10.0x/9.0x. While the stock trades at a low P/BV of 0.19x, we reckon it is reflective of WCT’s volatile earnings and fragile balance sheet.

Source: Hong Leong Investment Bank Research - 27 Nov 2020