WCT Holdings’ 6M19 results were within our expectations but above the street’s. Net profit fell 21% yoy to RM63m in 6M19 due to lower construction and property-development earnings. Net profit fell 44% qoq to RM23m in 2Q19, mainly due to the absence of a land sale net gain of RM30m in 1Q19. We expect better 2H19 core earnings as progress billings accelerate for its construction arm with the resumption of the LRT Line 3 project. We reiterate our HOLD call and RM0.96 target price (TP), based on a 50% discount to RNAV.

Within Our Expectations

Net profit of RM63m (-21% yoy) in 6M19 accounted for 60% of the market consensus full-year forecast of RM105m (above market expectations) and 50% of our RM126m estimate (within our expectation). Revenue was down 20% yoy to RM965m in 6M19 due to lower construction (-22% yoy) and property-development (-29% yoy) revenue. Slower construction progress billings and weak property sales contributed to the lower revenue. Property investment revenue was up 20% yoy due to higher occupancy for its Paradigm Johor Bahru Mall and AEON Bukit Tinggi Shopping Centre.

Lower Construction and Property Development Earnings

Operating profit fell 9% yoy to RM166m in 6M19 on lower construction (-27% yoy) and property-development (-5% yoy) earnings, which was partly offset by higher property-investment earnings (+37% yoy). Land sale gains boosted property-development earnings, while higher shopping-mall revenue and sale of an investment property in Klang lifted property-investment earnings.

High Order Book to Sustain Operations

WCT’s remaining order book of about RM5.8bn should sustain its construction earnings over the next 3 years. There is good prospect to replenish its order book with the revival of the East Coast Rail Link project and implementation of infrastructure projects in East Malaysia. WCT achieved lower property sales of RM88m in 6M19 compared to RM111m in 6M18 due to the weak market conditions. It remains focused on reducing its RM0.5bn property inventories.

Maintain HOLD Call

We maintain our earnings forecasts on expectations of better performance for its construction and property-investment divisions in 2H19. Maintain our HOLD call on WCT with TP of RM0.96, based on 50% discount to RNAV.

Key Risks

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

Source: Affin Hwang Research - 28 Aug 2019