WCT’s 1Q18 result was in line with market expectations but below ours. Net profit increased 16% yoy to RM38.4m in 1Q18, mainly driven by higher construction and property investment earnings. Weaker sales led to lower property development earnings. We cut our EPS forecasts by 10-17% in 2018-20E. We believe the recent sharp stock sell down has reflected the political and high leverage concerns but there is no catalyst to spark a upward re-rating of the stock. We downgrade our call to HOLD from BUY with a lowered TP of RM0.85, based on 50% discount to reduced RNAV.

Below Our Expectation

Net profit of RM38.4m (+16% yoy) comprises 24% of consensus FY18E forecast of RM159m but only 21% of our estimate of RM186m. We maintain our earnings forecasts on expectation that progress billings on its RM5bn order book will accelerate. Revenue was up 14% yoy, driven by construction (+16% yoy) and property investment (+152% yoy) segments. The fullquarter contribution from its new Paradigm Johor Bahru Mall lifted property investment revenue. Operating profit increased 67% yoy to RM82.5m with higher construction (+97% yoy) and property investment (+89% yoy) earnings. Core net profit increased 3% yoy to RM38.9m.

Weaker Property Development Earnings

Property development operating profit fell 26% yoy on lower revenue from disposal of inventories, which remains WCT’s focus and there was no new property launches in 1Q18. It is positive to note that operating profit margin improved to 15.3% in 1Q18 from 10.4% in 1Q17, mainly due to the expansion in construction margin to 13.3% in 1Q18 from 7.8% in 1Q17. Net gearing increased to 0.94x as its de-gearing efforts were hampered by delays for its proposed listing of WCT REIT and private placement of new shares.

Earnings Cut

We cut our EPS forecasts by 10-17% in 2018-20E to reflect slower property sales and lower EBIT margin as the market remains challenging. We cut our RNAV/share for WCT to RM1.70 from RM2.37 to reflect lower property segment valuation and higher net debt as at 31 March 2018. Based on the same 50% discount to RNAV, we cut our TP to RM0.85 from RM1.18.

Downgrade to HOLD

We downgrade our call to HOLD from Buy. Current 2018E PER of 7x is undemanding but earnings forecasts risk remains due to its weak property earnings. Key upside risk is property sales rebounds. Key downside risk is its debt restructuring is delayed leading to possible debt rating downgrade.

Source: Affin Hwang Research - 24 May 2018