We attended WCT's Analyst Briefing last week and came away from the briefing feeling NEUTRAL (leaning towards negative) as there seems to be more negatives rather than positives as far as the group's outlook is concerned. Firstly, property sales have been slowing down recently especially in the Iskandar region, following the government's measures on cooling down the property sector coupled with tight financing requirements. This has prompted the management to review its initial target sales of RM1.2b this year (so far only achieved RM245m YTD). Secondly, the construction division’s margin could only stay at this level given that its orderbook is populated by these low-margin projects (buildings). Thirdly, we understand that the industry is facing intense competition, which is affecting the construction division. All in, we cut our FY14-FY15 earnings forecasts by 28-29% after revising downwards our property sales forecast, orderbook replenishment target and construction margins assumptions. Nonetheless, despite the revisions, we reiterate our MARKET PERFORM rating with lower Target Price of RM2.21 (from RM2.32 previously) as WCT might also surprise us with new contract flows in the near-medium term given its strong tenderbook of RM4.6b.

2Q14 results recap. 2Q14 core net profit declined by 20% QoQ and 21% YoY respectively, dragged down by the construction segment. Construction division’s revenue which makes up 64% of topline declined by 8% QoQ due to slower billings from both Malaysia and Middle East projects as well as weaker margins. The division’s EBIT margin shrunk to 8% from 10% in 1Q14. Weaker construction margins were mainly because its orderbook is populated by low-margin projects i.e. buildings-related jobs (excluding the RAPID infraworks as the project was just recently secured). Hence, we expect that at least for the next two quarters, the construction EBIT margin may be stucked at the 8-9% level.

Property sales slowdown prompting review in sales target. WCT has started to feel the slowdown in the property market as it only achieved about RM27m new sales in 2Q14, bringing its YTD sales to only RM245m. This is very far from their target sales of RM1.2b by end-FY14. The main reasons for the slowdown in its property sales are stringent requirement of obtaining loans coupled with the more cautious buying sentiment in Iskandar, Johor. Hence, this prompted the management to review its property sales target of RM1.2b by adjusting the timing of some of its launches, especially in Iskandar (Medini).

Intense competition in construction industry. We understand that there is concern over the industry becoming increasingly more competitive. This is due to the fact that some of the projects that the group specialized in (i.e. big-scale earthworks and infraworks, buildings) were lost to some smaller-size players.

Still actively looking for new jobs. Nonetheless, management still reiterated its target to secure RM2.0b new contracts this year of which RM1b woud be from overseas and the remaining RM1.0b from domestic market. As for the domestic scene, the group is still eyeing some major infra works in RAPID (RM1.0b), Kwasa Damansara earthworks (RM1.0b), IKANO building in Cochrane (RM700m) and WCE highway. As in overseas, the group is eyeing for some infrastructure jobs (bridges and roads) in Qatar worth about in excess of RM1.0b.

Forecasts. We cut our FY14-FY15 earnings forecasts by 28-29%. This is after: (i) toning down its property sales forecast to RM600m from RM1.0b, (ii) reducing the orderbook replenishment target to RM700m from RM1.5b previously, and (iii) modifying our construction margins assumption to 9% from 12% previously.

Maintain MARKET PERFORM with TP of RM2.21. Despite the earnings revision, we reaffirm our MARKET PERFORM (MP) rating with revised SoP-driven TP of RM2.21 from RM2.32 previously. We reiterate our MP call as the group might surprise us with new contract flows in the near-medium-term given its strong tenderbook of RM4.6b.

Source: Kenanga