WCT’s 1Q17 results were in line with expectations. Core net profit increased 19% yoy to RM38m in 1Q17, mainly driven by higher construction earnings. We maintain our earnings forecasts as progress billings will likely remain strong for its RM4.5bn order book. New contracts worth RM2bn clinched in 2016 should spur core EPS growth (+118% yoy) in 2017E, while new-contract-procurement prospects remain good. We reiterate our BUY call and TP of RM2.46, based on a 10% discount to RNAV.

Earnings Rebound in 1Q17

WCT’s 1Q17 net profit of RM33m accounted for only 22% of the consensus and our full-year forecasts of RM148-152m. But core net profit was 25% of our full-year forecast. Revenue declined 2% yoy but increased 4% qoq to RM473m, driven by rising construction progress billings. Net profit jumped 275% yoy and 843% qoq to RM33m in 1Q17 due to lower one-off losses incurred compared to 1Q16 and 4Q16. Under FRS 139, WCT recognized a fair value loss of RM29.4m for a joint venture and finance cost of RM17.7m on receivables, which were partly offset by an unrealized forex gain of RM21.9m in 4Q16. WCT recognized an unrealized forex loss of RM23.1m in 1Q16 compared to RM4.3m in 1Q17.

Higher Core Earnings

Core net profit increased 19% yoy to RM38m in 1Q17, driven by higher construction earnings. The earnings contribution from its new projects and improved profitability (EBIT margin improved to 7.8% in 1Q17 vs 1.0% in 1Q16) spurred a 7-fold increase in construction EBIT to RM30.1m. Property development EBIT remained lacklustre at RM11.4m (-38% yoy) due to weak sales of RM281m in FY16. Property investment EBIT grew 5% yoy to RM7.9m following the upward rental revision last year.

Strong Earnings Growth in FY17E

We expect WCT’s operating performance to remain strong in subsequent quarters, supported by an order book of RM4.5bn and unbilled sales of over RM0.5bn. We expect net profit to be up by 118% yoy to RM152m in 2017E.

Top Sector BUY

We expect the potential corporate restructuring, asset monetization and degearing efforts to spur interest in WCT. We believe a merger between WCT and Malton is likely for Tan Sri Desmond Lim to consolidate his shareholding in both companies. We reaffirm our BUY call with a 12M TP of RM2.46. WCT is one of our top sector picks. Key risks to our positive view would be slower property sales and execution risks on its construction projects.

Source: Affin Hwang Research - 30 May 2017