WCT’s FY22 core LATAMI of -RM6.4m was below our and consensus expectations. Construction orderbook of RM3.5bn is near decade low though there could be more opportunities in FY23. Going forward, we see improving profitability at its property investment and property development divisions. We remain cautious on the stock due to elevated net gearing level of 108%. Orderbook expansion could come at the expense of balance sheet deterioration. Cut FY23 & FY24 earnings forecasts by -16.1% & -6.7%. Maintain HOLD rating with unchanged TP of RM0.50.

Missed expectations. WCT reported 4QFY22 results with revenue of RM466.5m (- 0.8% QoQ, 10.8% YoY) and core LATAMI of -RM45.1m (vs. core PATAMI of RM12.5m in 3QFY22 and core LATAMI of -RM208.6m in 4QFY21). This brings FY22 core LATAMI to -RM6.4m (vs core LATAMI of -RM249.8m in FY21). Results fell below our and consensus expectations (HLIBf: RM48.0m; consensus: RM46.2m). Main deviation to our forecasts was weaker than expected margins from construction segment.

EIs. In deriving core PATAMI for 4QFY22, we have made the following adjustments: (i) reversal of doubtful debts - RM10.0m, (ii) net write-down of inventory properties & land held for development - RM18.1m, (iii) net FV gain investment properties - RM68.1m and (iv) net FV gain on hotel held by JV - RM10.7m. We have adjusted 2QFY22 numbers for RM63m of reversal of taxation provision. No adjustments were made for land sale.

Dividends. DPS of 0.5 sen was declared with ex. date to be determined later.

QoQ. 4QFY22 fell to a core loss of -RM45.1m dragged by substantially weaker contribution from the construction segment. The segment descended to an LBIT of - RM43.9m vs EBIT of RM46.1m in 3QFY22. We attribute this to an inflationary costs environment dragging project margins down.

YoY. WCT reported narrower core loss of -RM45.1m (against core loss of -RM208.6m in 4QFY21). This was driven by better performance from all segments. In our view, this was due to low base of comparison with 4QFY21 still reeling from the effects of disrupted operations and limited operating days as this was dependent on site vaccination rates.

YTD. Likewise, WCT reported substantially narrower core loss compared with FY21, due to disrupted operations as elaborated in the above para.

Outlook. Construction unbilled orderbook levels stand at an estimated RM3.5bn, translating to a 2.4x cover on FY22 construction revenue. Unbilled construction orderbook is close to its decade low of RM3.1bn recorded in 2014, having finished FY22 empty handed. We expect its contract replenishment to fare better in FY23 considering there will be airport expansion/upgrade opportunities as announced under Budget 2023. Going forward, we see improving profitability at its property investment and property development divisions. Nevertheless, we remain cautious on potential balance sheet intensive projects (PFI basis) given its still weak state (4QFY22 net gearing: 108% including perps).

Forecast. Cut FY23 & FY24 earnings forecasts by -16.1% & -6.7% after adjusting downward construction margin assumptions.

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 as we rollover our valuation base to FY23. The stock currently trades at FY23/24 P/E multiple of 10.1x/9.7x. Catalysts: contract wins and strong property sales. Downside risks: margins, project execution, sizable PFI ventures and rate hikes.

Source: Hong Leong Investment Bank Research - 28 Feb 2023