WCT’s earnings should recover in FY21 but we anticipate poorer margins resulting from downward margin revisions, ongoing rental rebates as well as low margin on sales of inventory properties. Job wins and property sales target of RM2bn and RM1bn sounds a tad aggressive. Nonetheless, we may see some award progress in Sabah in the near term. Cut FY21-22 earnings by -5 to -14%. Maintain HOLD with lower SOP-driven TP of RM0.61. While WCT is poised to recover gradually along with declining cases, we reckon this is largely priced-in trading at FY21-22 P/E multiple of 15.3x/14.5x.

Below Are the Key Takeaways From Yesterday’s Briefing:

Construction. WCT’s outstanding orderbook stands at c.RM5.0bn (cover ratio of 4.0x). The company recently secured a RM137m contract in relation to a hotel and office superstructure works at TRX. Looking ahead, FY21 job wins target stands at RM2bn to be backed by over RM10bn worth of tenders submitted/pending submission (RM4bn from building works). On the infra side, near term opportunities centres largely in Sabah, PBH Sabah in particular. Management is also anticipating a potential award of c.RM400m for airport expansion. 4Q20 saw poor segment performance as WCT marked down project margins across the board (-1% at EBIT level) further exacerbated by a near 2 week disruption at Pavillion DH (52% of orderbook). However, 1Q21 could see a c.RM40m writeback in relation to savings from its Qatari settlement agreement.

Property development. FY20’s property sales came in at a commendable RM350m. Unbilled sales stands at RM152m representing a depleting 0.4x cover. Despite the MCO impact, capitalising on online marketing and sales platform has turned out to be more popular than walk-ins. Management is targeting an aggressive RM1bn sales figure for FY21 with RM160m of bookings achieved so far this year. Underpinning this aggressive sales target would be launches amounting to a GDV of RM1.7bn. We are forecasting sales of RM500m in 2021 given the current lacklustre market conditions. WCT also divulged that land sales of RM133m was finalised and would be reflected in 1Q21 results.

Property investment. Occupancy rates declined in 4Q20 from 3Q20 for Gateway (91% to 87%), Paradigm JB (95% to 92%) and Skypark (92% to 91%, while Paradigm PJ improved (96-98%). Occupancy rates might not deteriorate this year as 50% of the expiring 18% of total NLA (in 2021) have been renewed by early March. Additionally, along with expectations of a vaccine driven recovery, WCT is receiving increasing enquiries from international retailers for some of its assets. Nonetheless, outlook remains bleak for its hotel side with rates hovering at roughly 20% and would require significant progress on the vaccine rollout and allowing interstate travel before a meaningful recovery can be expected.

Forecast. Cut FY21-22 earnings by -5.1% and -14.3% after adjusting for margins and billings assumptions.

Maintain HOLD, TP: RM0.61. Maintain HOLD with lower TP of RM0.61 post- earnings adjustment (from RM0.64). TP is derived based on a 20% discount to SOP value of RM0.76. Our TP implies FY21/22 P/E of 16.4x/15.5x. While WCT is poised to recover gradually along with declining cases, we reckon this is largely priced-in trading at FY21-22 P/E multiple of 15.3x/14.5x.

Source: Hong Leong Investment Bank Research - 25 Mar 2021