After a weak 1QFY18 performance, there is further disappointment in the 2QFY18 result. WZ reported a core net loss of RM8.5m in 2QFY18 due to weak construction earnings and RM3.6m operating loss for oil & gas (O&G) segment. WZ posted a net profit of RM0.7m in 1HFY18 mainly due to a one-off subsidiary disposal gain. We cut our fullydiluted EPS forecasts by 13-45% in FY18-20E to reflect weaker construction and O&G earnings. We reiterate our SELL call with lower TP of RM0.45, based on 10% discount to RNAV

Operational Losses

Net profit of RM0.7m (-95% yoy) in 1HFY18 was below our expectation, ie, just 8% of our previous full-year forecast of RM8.6m. Core net loss of RM8m in 1HFY18 was mainly due to a 62% yoy plunge in construction EBIT and RM2.9m loss incurred by the O&G segment. The O&G segment incurred provisions for costs incurred pending certification of variation orders. The construction division was affected by adverse weather and lack of jobs with viable margins. The mining associates incurred net loss of RM3.4m in 1HFY18 as the ban on mining and export of bauxite in Pahang remains in force.

Sustained by High Order Book

Current order book of RM987m, equivalent to 2.1x FY17 construction and O&G revenue, will sustain its activities going forward. WZ is bidding for RM2bn worth of new contracts, which includes affordable housing for civil servants, packages for the East Coast Rail Link and DUKE Phase 3 projects. The weak construction EBIT margin of 3.2% in 1HFY18 vs 7.1% in 1HFY17 and losses for the O&G business remain our key concerns.

Earnings Cut

We expect WZ to see turn around in 2HFY18 assuming no further provision for O&G variation orders and progress billings for its construction jobs accelerate. But we cut our EPS forecasts by 13-45% to reflect the weak 1HFY18 result and sustained weak EBIT margin for ongoing projects.

Maintain SELL

WZ’s current FY18E PER of 45x is not attractive. We reiterate our SELL call with a reduced TP of RM0.45 from RM0.76, based 10% discount to our reduced RNAV/share of RM0.50 (RM0.84 previously).

Source: Affin Hwang Research - 27 Apr 2018