Period  2Q13/1H13

Actual vs. Expectations  WCT’s 1H13 core net profit of RM89.9m came in within expectations, making up 55% and 45% of our and market’s estimates. We derived its 2Q13 core net profit after stripping out its unrealized forex gain of RM10m.

Dividends  An interim dividend of 3.5 sen was declared in the quarter which translates into 1.5% dividend yield. We expect the same quantum of dividend to be declared in 2H13.

Key Results Highlights  QoQ, 2Q13 revenue inched down by 2% to RM482.5 due to lower revenue in construction division amidst slower progress billings. Nonetheless, core net profit grew by 8% due to lower taxation costs. EBIT margin expanded by 2ppts to 13% thanks to higher construction division’s operating margin (i.e. 14% vs 12% in 2Q13) contributed by local projects.

 YoY, 2Q13 revenue and core net profit increased by 22% and 60% respectively. Stronger performance was mainly attributed to higher contribution from construction division.

 YTD, 1H13 revenue and net profit climbed by 32% and 10% respectively mainly attributed to stronger performance across divisions and low base effect in 1H12.

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

 Going forward, we believe WCT is poised to win at least another one or more jobs before year-end namely the remaining packages of TRX (Zone 1 and 2) and hospital construction jobs in Sabah.

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

Change to Forecasts  No changes in our forecasts pending more clarification from the analyst briefing today.

Rating   UNDER REVIEW

 The stock has retraced by 11% since our last report due to market sentiment. We are putting WCT UNDER REVIEW at this juncture pending clearer indication from management on WCT’s prospect going forward, especially on the Group’s ability to secure the remaining RM516m new contracts as per our new orderbook assumption.

 Nonetheless, we reaffirm our view that the stock is poised for re-rating if: (i) WCT’s new orderbook exceeds our assumption of RM1.0b, (ii) the Nad Al Sheba race course arbitration outcome favours WCT, (iii) the recentlycancelled RM1.0b Oman Highway is revived; and (iv) higher than expected sales from its property division.

Valuation  We are maintaining our Target Price of RM2.61 based on our SOP-valuation. We are pegging WCT’s construction division’s PER at 16x in our SOP, which is in line with our target forward-PER of 16-18x for big cap construction players.

Risks  Delays in construction projects.

 Rising building material costs.

Source: Kenanga