We continue to broadly expect earnings recovery in FY22 albeit from a low base with endemicity in place. Outstanding order book stands at RM4.4bn (cover: 3.5x) with no jobs secured so far in 2022. We think WCT is at a disadvantage for MRT3 turnkey tenders and could settle for a subcontract role in 2023. Management is guiding for property development losses at the net level for FY22 given the recognition gestation period for new projects. We do flag headwinds to property sales momentum in 2022 due to: (i) HOC expiry and (ii) interest rate hikes (HLIB expects in 50 bps 2H22). Property investment occupancy rates are broadly stable in 1QFY22 with expectations of gradual improvement in future quarters. Maintain forecasts. Maintain HOLD with SOP-driven TP of RM0.56. Concerns remain over execution risks and potential balance sheet heavy endeavours. Catalysts: contract wins and strong property sales. Downside risks: margins, project execution and capital intensive ventures.

Below Are the Key Takeaways From Last Week’s Briefing:

Construction. Revenue recognition remained sluggish in 1QFY22 but should gradually improve as physical progress accelerates. We expect WCT’s bottom-line to sequentially improve in 2QFY22 with the absence of ~RM24M perps distribution (1Q and 3Q payment). Outstanding order book stands at RM4.4bn (cover: 3.5x) with no jobs secured so far in 2022 (2021: RM1.1bn). Tender book of RM9bn is largely unchanged; ~60:40 split between infra and building jobs. Replenishment target for 2022 stands at RM1.0bn. MRT3 civil packages would require minimum financing period of two years, worth at least 10% of contract value. Given such, with net gearing including perps at 113%, we think this would put WCT at a disadvantage for turnkey tenders. The company would require financially strong JV partners but this comes at the expense of its equity participation. Hence, we think WCT’s likely role would be subcontracts from turnkey winners potentially in 2023. Civil turnkey tender briefings will be held in mid-June-22 with awards in Dec-22.

Property development. Unbilled sales have increased to RM241m. Sales for the quarter came in at RM94m lagging our expectations. Excluding land sale gain recognised in 1QFY22, segmental EBIT was marginal at RM0.2m. This is attributed to recognition of completed inventories which carries marked down profitability. Management is guiding for losses at the net level given the recognition gestation for its new projects before turning the corner next year. Management is aiming to launch five different projects going forward, carrying a cumulative GDV of RM2.8bn. We do flag headwinds to property sales momentum in 2022 due to: (i) HOC expiry and (ii) interest rate hikes (HLIB expects in 50 bps 2H22).

Property investment. Occupancy rates are broadly stable in 1QFY22 with expectations of gradual improvement in future quarters. Activities across all its assets have picked up significantly in 2QFY22. The border reopening with SG has also resulted in higher enquiries from retailers and could see more new leases.

Forecast. Maintained.

Maintain HOLD, TP: RM0.56. Maintain HOLD with TP of RM0.56 based on an unchanged 30% discount to SOP value of RM0.80. The stock currently trades at FY22/23/24 P/E multiple of 15.2x/8.9x/5.7x. Catalysts: contract wins and strong property sales. Downside risks: margins, project execution and capital intensive ventures.

Source: Hong Leong Investment Bank Research - 30 May 2022