WCT’s 9MFY21 core LATAMI of -RM75m was below our and consensus expectations. Performance should start recovering towards year end as operations have normalised in Oct-21. Its decent construction order book of RM5.0bn (4.0x cover) will anchor earnings moving ahead. WCT’s prospects are levered to the reopening and its string of success in raising cash does provide comfort. Maintain forecasts pending briefing and HOLD rating with unchanged TP of RM0.64. Catalysts: sustained reopening, dissipating political noise and recovery in job flow s. Downside risks include: Covid-19 setbacks, return of political uncertainty and larger than expected cash burn.

Big miss. WCT reported 3QFY21 results with revenue of RM451.7m (+3.7% QoQ, +6.7% YoY) and core LATAMI of -RM51.4m (vs. core PATAMI of RM16.1m in 2QFY21 and RM2.7m in 3QFY20). This brings 9MFY21 performance to core LATAMI of -RM74.8m (9MFY20: -RM4.2m). We deem the results below our and consensus expectations (we projected FY21 core earnings of RM11.9m; while consensus projected core earnings of RM49.1m).

EIs. In deriving 9MFY21 numbers, we have adjusted 1QFY21 for: (i) revenue and net profit from land sale of RM135m and RM57m and (ii) reversal of arbitration expense of RM48m. One-offs for 3QFY21 were: (i) Forex gain from Meydan proceeds of RM38m and (ii) legal & administrative costs for Meydan settlement of RM22m. No EIs are assumed for 2QFY21.

Deviations. Earnings missed on weaker-than-expected revenue.

Dividends. No dividend was declared for the quarter.

QoQ/YoY. Despite higher revenue (3.7% QoQ, 6.7% YoY), WCT turned to core LATAMI of -RM51.4m due to lower realised margins from its construction and property segments. We think this was due to impact from higher materials costs incurred by the construction segment. Its property segment was also harder hit by lockdowns this quarter, dipping into losses at the operating level of -RM6.6m.

YTD. On a YTD basis, despite higher revenue of 5.3%, core LATAMI widened from -RM4.2m in 9MFY20 to -RM74.8m in 9MFY21 due to: (i) weaker operational margins, in particular its property segment, (ii) wider losses at JV and (iii) higher perpetual distribution.

Lok Kawi venture. WCT has paid RM8.4m to subscribe to an option to acquire mostly submerged land from Yayasan Sabah over 15 years, a maximum 411 acres (11 parcels) for RM840m or 12% of estimated GDV (est. RM7bn) whichever is higher. WCT will have to acquire a minimum of 2 parcels. While long term earnings accretive, we are cautious on two reasons: (i) reclamation costs could undermine feasibility and (ii) downside to GDV estimates. On the former, estimated reclamation costs on the initial 2 parcels~110 acres (least submerged i.e. cheapest to reclaim) amounts to RM100m which pegs the land costs for 11 parcels at a steeper 17% of est. GDV (minimum). Adding to this, there is downside risk to est. GDV if it’s based on pre Covid economics. Case in point, the recently terminated development of more centrally located, One Jesselton Waterfront project in KK citing uncertain returns post pandemic. We have not imputed contribution from the venture due to its long term nature.

New tax measures. WCT’s remittance of its quarterly~RM42m Meydan arbitration proceeds could attract tax from the recent exemption removal on foreign sourced income upon remittance. However, we note that Malaysia does have double taxation avoidance agreements with UAE; impact could be much smaller if tax credits claims are allowed, in our view.

Outlook. WCT’s earnings should start recovering next quarter with works ramping up substantially in Oct-21 in tandem with worker vaccination progress. Its decent construction order book of RM5.0bn (4.0x cover) will anchor earnings moving ahead. The company’s string of success in raising cash via land sale and arbitration win does provide comfort during this difficult period (c.RM800m assuming no repayment to subcons). Within our coverage, WCT’s prospects are most levered to the reopening with its leisure and hospitality segment poised to benefit. Nonetheless, we do flag headwinds to property sales momentum going into 2022 if: (i) no extension to HOC and (ii) interest rate hikes (HLIB expects in 2H22).

Forecast. Maintain forecasts pending further clarity from today’s briefing.

Maintain HOLD, TP: RM0.64. Maintain HOLD with unchanged TP of RM0.64 based on a 20% discount to SOP value of RM0.80. Our TP implies FY21/22/23 P/E of 75.8x/22.7x/11.4x. Catalysts: sustained reopening, dissipating political noise and job flow recovery. Downside risks include: Covid-19 setbacks, return of political uncertainty and larger than expected cash burn.

Source: Hong Leong Investment Bank Research - 26 Nov 2021