• WCT’s 2Q20 results were within market and our expectations. Net profit of RM7.4m in 2Q20 was an improvement from the breakeven in 1Q20.
• Certain construction projects had to stop work during the Movement Control Order (MCO) period but the completion of The Waltz condominium boosted property development earnings.
• We maintain our earnings forecasts on expectation of a sustained recovery in earnings as operations have resumed fully in 3Q20. We reiterate our HOLD call with a RM0.41 target price (TP), based on 70% discount to RNAV.

Within Our Expectation

WCT reported net profit of RM7.4m (-88% yoy) in 6M20 compared to consensus and our full-year forecasts of RM39.4m and RM53.4m respectively. We expect better 2H20 performance as its operations have resumed fully in 3Q20 and there is potential land sale gain of RM23m to be recognised in 2H20. Revenue fell 24% yoy to RM738.0m in 6M20, mainly due to lower construction (-30% yoy) and property investment (-15% yoy) revenue. Property development revenue grew 5% yoy in 6M20, mainly driven by the completion of The Waltz condominium project. Pre-tax profit fell 66% yoy to RM33.4m in 6M20 due to weaker operating performance and net exceptional loss of RM2.1m incurred, compared to RM30.6m gain in 6M19.

Weak Construction and Property Investment Earnings

Construction earnings fell 95% yoy to RM3.9m in 6M20, mainly due to lower construction activities during the MCO period and the revision in the expected profit margins of certain construction projects (construction operating profit margin of 0.8% in 6M20 vs 9.8% in 6M19). Property development earnings were up 10% yoy to RM49.5m in 6M20, boosted by better operating profit margin and revenue. Property investment earnings fell 17% yoy to RM41.3m in 6M20 due to rental rebates granted to tenants of its retail malls and weak performance of its hotels, which were affected by the travel restrictions under the MCO.

Earnings Risk Remains

We remain cautious on WCT’s earnings prospects as we expect a slow recovery in construction activities, property demand and hotel patronage. But we maintain our earnings forecasts on expectations of a sustained earnings recovery in 2H20. Given that earnings forecast risk remains high, we increase the discount to RNAV to 70% from 60% previously to derive our new TP of RM0.41 (cut from RM0.54 previously). Current share price is supported by attractive Price/book of 0.2x. Maintain our HOLD call.

Source: Affin Hwang Research - 27 Aug 2020