WCT’s FY21 core LATAMI of -RM285m was significantly below our and consensus expectations as operations in 4Q deteriorated. We expect performance to start recovering in FY22 from a low base with restrictions largely removed. Construction order book of RM4.8bn is decent (3.7x cover) and will anchor earnings moving ahead. WCT’s prospects are levered to the reopening and its string of success in raising cash does provide comfort. However, we are cautious on potential balance sheet intensive endeavours given its still fragile state. Maintain forecasts pending briefing and HOLD rating with lower TP of RM0.53.

Big miss. WCT reported 4QFY21 results with revenue of RM421.0m (-6.8% QoQ, -23.1% YoY) and core LATAMI of -RM209.0m (vs. core LATAMI of -RM52.4m in 3QFY21 and -RM27.5m in 4QFY20). This brings FY21 performance to core LATAMI of -RM284.8m (FY20: -RM32.8m). We deem the results significantly below our and consensus expectations (we projected FY21 core LATAMI of -RM55.2m; while consensus projected core earnings of RM12.9m).

EIs. In deriving FY21 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. 4QFY21 was adjusted for net gain from Meydan settlement of RM260m.

Deviations. Earnings missed on weaker-than-expected revenue and margins as the anticipated 4Q recovery did not materialise.

Dividends. DPS of 0.5 sen was declared for the quarter. Ex-date to be announced later.

QoQ/YoY. Core LATAMI widened on a QoQ and YoY basis due to weaker contributions from all segments; a combination of lower revenue and margins. Noticeably, the construction segment was slow to recover with revenue sinking by -9.8% QoQ. This is despite works being guided to have substantially ramped up by Oct-21.

YTD. For FY21, losses widened to -RM284.8m from -RM32.8m in FY20 with contributions weaker from all segments where the impact is more pronounced for construction and property divisions.

Outlook. WCT’s earnings should start recovering albeit from a low base as we believe operations would have largely normalised by now. Its decent construction order book of RM4.8bn (3.7x 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 due to: (i) HOC expiry and (ii) interest rate hikes (HLIB expects in 2H22). We are also cautious on potential balance sheet intensive endeavours given its still fragile state.

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

Maintain HOLD, TP: RM0.53. Maintain HOLD with lower TP of RM0.53 based on a higher 30% discount to SOP value of RM0.75 (from 20%). Our TP implies FY22/23 P/E of 14.7x/8.2x. Catalysts: sustained reopening, dissipating political noise and job  flow recovery. Downside risks: Covid-19 setbacks, return of political uncertainty and larger than expected cash burn.

Source: Hong Leong Investment Bank Research - 25 Feb 2022