Pavilion Secured

WCT Holdings has secured the RM1.77bn Pavilion Damansara HeightsParcel 1 project. This contract will increase its order book to a high RM7.22bn, equivalent to 5.2x FY17 construction revenue. However, the potential cut in contract value for its MRT2 and LRT3 work packages could reduce its order book. We cut our earnings forecasts by 1-5% for FY18-20E to reflect higher working-capital requirements, but raise our RNAV/share estimate to RM1.85 from RM1.70 previously to reflect a higher construction division valuation. Based on the same 50% discount to RNAV, we raise our TP to RM0.92 from RM0.85. Maintain HOLD call.

Awarded Pavilion Damansara Heights Contract

WCT has accepted a letter of award from Impian Ekspresi Sdn Bhd (a company related to its Executive Chairman Tan Sri Desmond Lim) for the construction of Pavilion Damansara Heights-Parcel 1, comprising 9 office blocks, 3 serviced apartment blocks on a podium block comprising retail space, mezzanine and lower ground floors, and basement carparks. The contract sum is approximately RM1.774bn and works are expected to commence in September 2018 and be completed in 38 months.

Large Order Book

The new RM1.77bn Pavilion Damansara contract will lift its current outstanding order book of RM5.44bn to a high of RM7.22bn, equivalent to 5.2x FY17 construction revenue. The RM2.33bn of new contracts secured year to date has exceeded our assumption of RM0.5bn in FY18E. The Pavilion contract is expected to boost FY19-20E EPS by 3-4%. However, we believe higher working-capital requirements due to slow property sales will increase net interest expense, prompting us to cut our EPS forecasts by 1-5% for FY18-20E.

Downside Risk on MRT2 and LRT3 Contract Values

We understand that the government is looking to reduce the construction costs for the MRT2 and LRT3 projects. WCT’s work packages for these 2 projects have a remaining value of RM2.3bn, comprising 32% of its order book. Hence, there is downside risk to earnings if the contract value is reduced for WCT’s MRT2 and LRT3 contracts.

Maintain HOLD

We remain concerned with WCT’s high net gearing of 0.98x and the delays in executing its de-gearing plans, ie, proposed private placement of new shares and listing of WCT REIT. We reiterate our HOLD call on WCT with a higher TP of RM0.92, based on a 50% discount to RNAV.

Raise RNAV and TP; Maintain HOLD Call

We raise our RNAV/share estimate to RM1.85 from RM1.70 to reflect a higher construction division valuation. We increase our construction sustainable earnings assumption to RM80m from RM60m previously given the expansion in its order book. Based on the same PER of 12x, we raise our construction division valuation to RM960m from RM720m previously. Applying the same 50% discount to RNAV, we raise our target price to RM0.92 from RM0.85 previously. Maintain our HOLD call on WCT.

Key Risks

Key upside risk is a property sales rebound. Key downside risk is if its debt restructuring is delayed, leading to possible debt rating downgrade.

Source: Affin Hwang Research - 19 Sept 2018