WCT’s focus on growing domestic order book to improve profitability has started to pay off. Net profit jumped 47% yoy to RM95m in 9M17, which was within our expectation but below market expectations. Excluding forex losses, core net profit grew by a stronger 60% yoy in 9M17. Order book of RM5.9bn and unbilled sales of RM322m will sustain the earnings trajectory in 4Q17. WCT remains one of our top BUYs among construction stocks with 12M TP of RM2.46, based on 10% discount to RNAV.

Within Our Expectattion

WCT’s net profit of RM95 comprise 73% of our FY17E estimate of RM130m but was only 64% of consensus FY17E forecast of RM149m. Revenue eased 10% yoy to RM1.33bn in 9M17 due to lower construction revenue (- 22% yoy), which was partly offset by higher property development revenue (+46% yoy) and property investment revenue (+7% yoy). Operating profit jumped 44% yoy to RM172m, mainly driven by the construction division (+191% yoy). Construction operating profit margin improved to 10.7% in 9M17 compared to 2.9% in 9M16 as local construction projects started to contribute more to revenue, while project execution efficiency improved.

Strong New Contract Procurement

WCT has secured RM1.8bn new contracts to date, raising outstanding order book to about RM5.9bn. Property sales of about RM277m supported property revenue growth in 9M17 with some of sales of completed properties (inventories). But property development operating profit margin fell to 13.8% in 9M17 from 26.8% in 9M16.

Good Prospects to Replenish Order Book

WCT is keen to bid for several building jobs in Klang Valley, RM2bn KLKlang Bus Rapid Transit, an elevated highway and East Coast Rail Link projects. This will support order book replenishment or expansion. Net gearing improved to 0.86x at end-3Q17 from 0.90x at end-2016 following the private placement equivalent to 8% of share capital.

Maintain BUY

We expect the potential corporate restructuring, asset monetization and degearing efforts to spur interest in WCT. 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 construction execution risks and overhang from the proposed private placement of new shares of up to 10% of share capital (maximum of 140m new shares).

Source: Affin Hwang Research - 23 Nov 2017