With the imposition of SOP constraints, we expect near term earnings weakness from most segments. While property sales have been strong, it has come at the expense of margins and should this remain status quo. Prospects for its property investment arm would hinge on pace of inoculation moving forward. On the brighter side, WCT is optimistic in achieving its RM2bn job target (30% done). Overall, company is focused on monetising idle assets to meet arbitration claims and sukuk repayment this and next year. Cut FY21-22 earnings by 1-15%. Maintain HOLD with lower SOP-driven TP of RM0.50.

Below Are the Key Takeaways From Yesterday’s Briefing:

Clarification on EIs. Management clarified that its RM48m write back is at the net profit level (we have earlier assumed a pre-tax amount). Hence this widens WCT’s 1QFY21 core loss to -RM40m from our earlier estimated -RM28m (Fig 2).

Construction. WCT’s outstanding orderbook stands at RM5.2bn (cover ratio of 4.2x). YTD jobs secured totalled about RM600m from both Kota Bahru airport and hotel/office project at TRX. Its RM2bn target for FY21 remains unchanged, with the remaining RM1.4bn spread across Peninsular and East Malaysia. We remain cautious in maintaining our RM1bn assumption for FY21 on account of possible slower rollout with the ongoing uncertainties from both the pandemic and fluid politics. WCT’s tenderbook of RM10bn remains largely unchanged, with a 60:40 split between infra and building jobs. Some notable job opportunities in Sabah include PBH Sabah and KK airport. Earnings wise, we expect sequentially weaker segmental earnings given: 1) 60% capacity constraints during MCO3.0 and 2) higher material prices and 3) possible lockdown.

Property development. Unbilled sales stands at RM184m representing a 0.5x cover. YTD sales have been strong with RM100m achieved in 1QFY21 and RM201m so far in 2QFY21. Nonetheless, we understand that about 2/3rds has come from its completed unsold inventory (RM199m cleared to date) from which WCT has marked down to the lower of cost or market value. This partly explains its low 1QFY21 property EBIT margin of 3%. We anticipate the status quo moving forward as WCT places priority on recouping cash from idle inventories. Focus on clearing inventories should intensify as WCT is maintaining their FY21 sales target of RM1bn while reducing target launches from RM1.7bn to RM773m, delaying launches at Mont Kiara and JGCC to FY22.

Property investment. Occupancy rates declined in 1Q21 from 4Q20 for Gateway (87% to 79%), Paradigm JB (92% to 87%) and Skypark (91% to 85%), while Paradigm PJ and Bukit Tinggi sustained. All of which resulted in topline decline of c.20% QoQ and YoY. The imposition of stricter MCO3.0 as well as sluggish vaccination rates could hamper recovery optimism in the near term resulting in occupancy pressure at WCT’s airport malls. The ongoing travel restrictions with SG should also continue to dampen retail sentiment in JB. Segmental performance for remainder of FY21 hinges on pace of inoculation whereby indications suggest pickup towards 2H21.

Recouping cash. In addition to its RM135m land sales booked in 1QFY21, WCT is working on another RM200m. However, nothing concrete has been reached thus far. Clearing of both land and idle inventory would go towards paying RM127m of arbitration claims, and RM200m of sukuk where RM100m will be rolled over. We note that in FY22, about RM400m of the sukuk will be due.

Forecast. Cut FY21-23 earnings by -14.9/-2.1/-0.8% after adjusting for margins and billings assumptions

Maintain HOLD, TP: RM0.50. Maintain HOLD with lower TP of RM0.50 post- earnings adjustment (from RM0.53). TP is derived based on a 20% discount to SOP value of RM0.63. Our TP implies FY21/22 P/E of 22.5x/14.3x. WCT’s business recovery will take time given its exposure to retail & travel exacerbated by high materials costs

Source: Hong Leong Investment Bank Research - 31 May 2021