Positive developments

WCT Holdings’ 3Q16 results were below our and market expectations. Core net profit rose 139% yoy to RM74m in 9M16 due to higher operating profit and lower interest expense. WCT has agreed to sell The Ascent office building for RM347m as part of its asset monetisation plan. We lift our fully diluted RNAV/share by 7% to RM2.37, reflecting WCT’s share of net cash proceeds of RM243m. Based on the same 10% discount to RNAV, we raise our target price to RM2.13 from RM2.00. Maintain BUY.

Result below expectations

WCT’s 9M16 net profit of RM65m comprises only 49% of the consensus fullyear forecast of RM132m and 60% of our RM108m estimate. We were surprised by the high effective tax rate of 39% vs our estimate of 24%. Pretax profit of RM111m was in line with our expectation (73% of full-year forecast of RM151m). We expect better performance in 4Q16 and FY17 as progress billings accelerate on its outstanding construction order book of RM3.9bn and unbilled property sales of RM562m.

Higher operating profit

Revenue grew 29% yoy to RM1.48bn in 9M16, driven by higher progress billings for its construction division. But net profit fell 57% yoy to RM65m in 9M16, mainly due to an unrealized forex loss of RM9m (compared to a gain of RM122m in 9M15) and a higher effective tax rate. Core net profit rebounded 139% yoy to RM74m on higher construction and property earnings. Net gearing rose to 0.88x at end-3Q16 from 0.77x at end-3Q15.

Positive developments

WCT announced that its 70%-owned joint venture company Jelas Puri has accepted a letter of offer from the Employees Provident Fund Board (EPF) to acquire The Ascent office building for RM347m with a leaseback arrangement. WCT also announced that it was awarded the MRT Line 2 Package V204 project for a contract value of RM896.4m, which would contribute positively to construction earnings over the 64-month construction period and build up its track record in undertaking major railway infrastructure works.

Maintain BUY

We view the recent change in the major shareholder positively as we believe Tan Sri Desmond Lim will drive WCT’s de-gearing, corporate restructuring and asset monetization plans. BUY. Key risks to our positive view are slower property sales and execution risks on its construction projects.

Source: Affin Hwang Research - 22 Nov 2016