Period     1Q13

Actual vs. Expectations    WCT’s 1Q13 net profit of RM43.2m came in within ours but below the consensus expectations, making up 27% and 22% of ours and that of the market estimates respectively. 

Dividends    There was no dividend declared in 1Q13.

Key Results Highlights     QoQ, both the 1Q13 revenue and core net profit rose by 29% and 37% to RM490.9m and RM43.2m respectively. The stronger performance was mainly due to a higher construction margin (1Q13 EBIT: 12% vs. 4Q12: 3%) recorded in 1Q13. Similarly, WCT’s property development’s EBIT margin expanded to 23% in 1Q13 from 14% in the preceding quarter.  

YoY, the 1Q13 revenue was up by 44% but its core net profit declined by 7%. The decline in the core net profit was mainly due to the lower margin in its construction division (1Q13 EBIT: 12% vs. 1Q12: 17%) following additional costs incurred from its recent arbitration loss amounting to RM26.3m (see our report titled “Middle East’s RM26.3m arbitration loss” dated 22^nd April). Note that we have already factored in the loss in our earnings estimates and hence, it was not a surprise. 

Outlook    To date, WCT has secured a total of RM484m worth of contracts.

Going forward, we believe the local construction sector’s prospect remains bright for WCT as we are expecting more high-impact infrastructure projects  to be rolled out from 2HFY13 onwards.

Hence, we are maintaining our RM1.0b order book replenishment assumption for FY13.

Change to Forecasts   No changes in our forecasts as the results were in line with our expectations.

Rating   Maintain MARKET PERFORM

We are maintaining our MARKET PERFORM recommendation on WCT at this juncture as we believe that the market has largely factored in the stock’s sound fundamentals. 

Having said that, we believe the stock will be re-rated if: 1) WCT’s order book replenishment exceeds our assumption of RM1.0b, 2) the Nad Al Sheba Racecourse arbitration outcome is in WCT’s favour, 3) the recently cancelled RM1.0b Oman Highway is revived and awarded to WCT again and 4) higher than expected property sales.

Valuation     We are revising our Target Price to RM2.61 (from RM2.43) after applying a higher multiple (16x PER from 14x) to its Construction’s FY14 earnings in our SOP valuation in tandem with our targeted PER of 16x-18x for the big cap construction players. 

Risks    Delays in construction projects.

Rise in building material costs.

Source: Kenanga