Construction Driven

WCT Holdings’ 1H18 results were within expectations. Net profit jumped 52% yoy to RM82m in 1H18, mainly driven by operating profits and lower unrealised forex losses. Core net profit grew a lower 6% yoy to RM80m.

Land sale gains boosted property development earnings while its new Johor Bahru mall lifted property investment earnings. Its high order book of RM5bn will sustain construction earnings growth. However, its high net gearing of 0.98x remains a concern. We reiterate our HOLD call with TP of RM0.85, based on a 50% discount to our estimated RNAV.

Within Expectations

Net profit of RM82m (+52% yoy) in 1H18 comprises 48-51% of consensus and our 2018E forecasts of RM155-166m. We maintain our earnings forecasts on expectations that progress billings on its RM5bn order book will accelerate and lift 2H18 results. Revenue surged 41% yoy to RM1.21bn, driven by the construction (+50% yoy) and property investment (+177% yoy) segments. But property development revenue declined 6% yoy on weaker sales of unsold properties in 1H18, which was partially offset by revenue from land sales in Serendah and Klang. The 6-month contribution from its new Paradigm Johor Bahru Mall lifted property investment revenue in 1H18.

Weaker Property Development Earnings

Operating profit jumped 88% yoy to RM179m as all divisions posted better earnings: construction (+87% yoy), property development (+83% yoy) and property investment (+101% yoy). There were no new property launches as WCT remained focused on disposing its unsold properties. Inventories increased 18% to RM544m in 1H18 as more unsold units were completed. Net gearing increased to 0.98x as at 30 June 2018 because its de-gearing efforts were hampered by delays for its proposed listing of WCT REIT and the private placement of new shares.

Earnings Maintained

We maintain our EPS forecasts and expect a slightly better 2H18 result, driven by higher progress billings for its construction division, stable property investment income and further sale of inventories. There is potential upside to our 2018E earnings as WCT could generate revenue of up to RM80m and PBT of RM45m from land sales in 2018, though this is not in our forecasts.

Maintain HOLD

We maintain our HOLD call and TP of RM0.85, based on a 50% discount to RNAV. The current 2019E PER of 8.5x is undemanding but earnings forecast risk remains due to its weak property earnings.

Key Risks

Key upside risk is a strong property sales rebound. Key downside risk is further delays in its debt restructuring efforts leading to possible debt rating downgrade.

Source: Affin Hwang Research - 28 Aug 2018