Earnings in FY22 are on track to finish on a better note from a low base in FY21. Construction order book of RM3.8bn is decent (3.3x cover) but replenishment in FY22 has been underwhelming. Several tender decisions have been delayed due to GE15. Pipeline includes MRT3, hospitals, flood mitigation and commercial projects. Property segment could remain in losses until recognition for OUG project picks up. We remain cautious on sales prospects due to further hikes, erosion of spending power and potential subsidy rationalisation impact on sentiment. Property investments assets are expected to continue recovering alongside higher sales at the malls. Tweak FY22 & 23 earnings by -2.8% and - 3.5% Maintain HOLD with unchanged SOP-driven TP of RM0.50.

Below Are the Key Takeaways From Yesterday’s Briefing:

Construction. Orderbook stands at ~RM3.8bn (3.3x cover). Replenishment has been non-existent in FY22; management had earlier targeted RM1.0bn contract wins this year. These would be wins are made up of federal funded jobs like hospitals and flood mitigation projects. Award decision could come in FY23 due to GE15 pending new cabinet. WCT’s tenderbook stands at RM9.0bn comprising MRT3, hospitals, flood mitigation and commercial projects. The company is also hoping to participate in remainder of PBH Sabah once funding model is decided. On earnings, its sequential recovery in 3QFY22 was lifted by VO recognition for two projects. Excluding this going ahead, 4QFY22 could normalise downwards. We expect margins to stay thin on the back of various costs pressure such as materials and labour.

Property development. Unbilled sales stayed flattish at RM303m. 9MFY22 sales came in at RM382m with another RM63m pending SPA. With one quarter left, management’s RM600m target may be a challenge. We estimate that ~80% of 9MFY22 property revenue (excluding land sales) came from inventory which was mostly marked down thereby keeping the segment in losses. We expect narrower losses going forward but could turn profitable when construction progress at its OUG project picks up. WCT’s only launch in FY22 is Adenia in Aug-22 (GDV: RM68m; affordable housing). The company has a slew of projects carrying a collective GDV of RM2.75bn to be launched going forward (KV: 63%; JB: 37%). We remain cautious on sales prospects due to further hikes, erosion of spending power and potential subsidy rationalisation impact on sentiment.

Property investment. Overall occupancy rates are stable in 3QFY22. Tenants at its PJ and JB malls have seen sales recovering to pre-Covid driven by endemicity while tenant sales at gateway@klia2 is still some way off pre-pandemic levels. Traffic is normalising in tandem with additional flight capacity. As air travel demand continues to normalise, the added flight capacity should translate to higher traffic at its airport malls. Management is guiding for higher rental reversion to be reflected from FY23 onwards.

Forecast. Tweak FY22 & 23 earnings forecasts by -2.8% and -3.5% after removing FY22 contract replenishment assumption.

Maintain HOLD, TP: RM0.50. Maintain HOLD with unchanged TP of RM0.50 based on an unchanged 30% discount to SOP value of RM0.72. We have previously 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/8.0x/5.1x. 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 Dec 2022