WCT’s 1HFY22 core PATAMI of RM26.1m was within our but below consensus expectations. We continue to expect earnings recovery in FY22 albeit from a low base with endemicity in place. Margins have taken a clear hit from inflation. With net gearing at 1.1x, sensitivity to rate hikes is relatively high. Construction order book of RM3.95bn is decent (3.4x cover) and will anchor performance moving ahead. Nonetheless, inflation and acute worker shortage could impede the scale of this recovery. No change to earnings. Maintain HOLD rating with lower TP of RM0.50.

Within expectations. WCT reported 2QFY22 results with revenue of RM561.2m (-7.2% QoQ, +28.8% YoY) and core LATAMI of -RM4.5m (vs. core PATAMI of RM30.6m in 1QFY22 and core PATAMI of RM16.1m in 2QFY21). This brings 1HFY22 core PATAMI to RM26.1m decreasing by -22.1% YoY. We deem the results within our but below consensus expectations at 54% and 41% of forecasts respectively. We have adjusted 2QFY22 numbers for RM63m of reversal of taxation provision. 1QFY21 was adjusted for RM48m of reversal in accrual costs for arbitration award. No adjustments made for land sales.

Dividends. No DPS Was Declared.

QoQ. Performance for 2QFY22 slipped into the red registering a core LATAMI of -RM4.5m (vs RM30.6m in 1QFY22) dragged by its property segment which posted an operating loss of -RM11.8m. The weaker property performance in 2QFY22 was due to absence of land sale (1QFY22 land sale contributed operating profit of RM56m). Its construction division saw top-line improving by 56.5% but EBIT was only better off by 3.2% as margins dived on the back of various costs inflation (EBIT margin: -1.7 ppts). Property investment performance continues its gradual normalisation trend with top-line similar to pre-pandemic levels.

YoY. WCT turned in a loss from core PATAMI of RM16.1m in 2QFY21 dragged by poorer profitability from construction and property segments as margins were squeezed (blended GP margin: -9.5 ppts). This more than offset higher revenue of 28.8% which are construction and property investments driven.

YTD. Despite revenue growing by 32.5%, 1HFY22 core PATAMI declined by -22.1%. In addition to the aforementioned margin squeeze in construction and property divisions, SPLY got a higher boost from vacant land sale (RM76m in 1QFY21 vs RM56m in 1QFY22; EBIT).

Outlook. We continue to expect earnings recovery in FY22 despite a weak showing in 1HFY22 relative to SPLY as 2HFY22 should look significantly better on a relative basis. Nonetheless, inflationary spikes in various costs and acute labour shortage might impede the scale of this recovery. Its decent construction orderbook of RM3.95bn (3.4x cover) will anchor performance moving ahead. We reckon WCT’s potential role in the upcoming MRT3 will likely be limited to a subcontract role as opposed to turnkey given its still stretched balance sheet. To this end, we believe due to stiff competition even a subcontract role will require a modified payment structure. While WCT is exposed to leisure and hospitality sectors which have benefitted from higher travel activities, we do flag headwinds to property sales momentum in 2H22 due to inflation eroding spending power and rate hikes. We are also cautious on potential balance sheet intensive endeavours given its still fragile state.

Forecast. No Change.

Maintain HOLD, TP: RM0.50. Maintain HOLD with lower TP of RM0.50 (from RM0.55) based on an unchanged 30% discount to SOP value of RM0.72. We have de-rated the target P/E multiple tagged to subsidiary earnings to 9x (from 12x) to be more in-line with smaller cap construction peers. The stock currently trades at FY22/23/24 P/E multiple of 12.7x/7.8x/4.9x. Catalysts: contract wins and strong property sales. Downside risks: margins, project execution, capital intensive ventures and rate hikes.

Source: Hong Leong Investment Bank Research - 1 Sept 2022