Construction order book of RM3.5bn is near decade low of RM3.1bn (2014). With 42% to be executed this year, management has set a target of RM3bn contract wins in FY23 (tenderbook: RM9.0bn). Subang airport expansion could expand orderbook at the expense of gearing. We expect stronger contribution from property development and investment segments going forward. Tweak FY23 & 24 earnings forecasts by 0.7% and -2.7%. Maintain HOLD with lower TP of RM0.48. We remain cautious on the stock due to its weak balance sheet (despite multiple deleveraging efforts) amidst a PFI driven contract environment.

Below Are the Key Takeaways From Yesterday’s Briefing:

Construction. Orderbook stands at RM3.5bn translating to a 2.4x cover on FY22 construction revenue. Construction orderbook is close to its decade low of RM3.1bn recorded in 2014, having finished FY22 empty handed (initial target: RM1.0bn). There is increased urgency to replenish in FY23 with approximately RM1.5bn worth of projects slated for completion this year (42% of orderbook). WCT’s target contract wins in FY23 is RM3.0bn which is based on a ~30% win rate of its RM9.0bn tenderbook. Projects mentioned are ECRL, flood mitigation, MRT3, PBH Sabah, coastal roads in Sarawak and infra/special building projects in Middle East. We gather that its tenderbook is not inclusive of the Subang Airport expansion project. As the current concession holder, WCT is working on proposals to be tabled to the government soon. We estimate the opportunity to be in excess of RM1.0bn, likely to involve a concession type payback. On margins, construction EBIT margins in FY22 ended at a thin 2.2%, below management’s guidance of mid-single digit. We expect margins to stay thin on the back of various costs pressure such as materials and labour.

Property development. Unbilled sales declined by -10% QoQ to RM273m. FY22 sales came in short of expectations at RM421m with another RM102m pending SPA (management’s target: RM600m). Around RM138m of inventory properties were cleared during the year, a majority came from Medini. 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 hikes, erosion of spending power and potential subsidy rationalisation impact on sentiment. On idle land sales, around 602 acres was disposed in FY22 with another 2 parcels in Klang targeted for sales in FY23 (~RM350m). We note that despite significant inroads to clearing inventories (RM506m to RM368m), land sales (816 acres to 221 acres) and Meydan arbitration proceeds (~RM615m received), net gearing (including perpetual sukuk) remains higher at 108% vs pre-pandemic levels (99%).

Property investment. Overall occupancy rates remained largely stable QoQ with the exception of Subang Skypark. Tenants at its PJ and JB malls have seen sales recovering to pre-Covid levels 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 FY23 & 24 earnings forecasts by 0.7% and -2.7% after adjusting for contract wins and debt level assumptions.

Maintain HOLD, TP: RM0.48. Maintain HOLD with lower TP of RM0.48 (from RM0.50) based on an unchanged 30% discount to SOP value of RM0.69 as we rollover our valuation base to FY23. The stock currently trades at FY23/24 P/E multiple of 9.4x/9.3x. Catalysts: contract wins and strong property sales. Downside risks: margins, project execution, sizable PFI ventures and rate hikes.

Source: Hong Leong Investment Bank Research - 1 Mar 2023