Period  3Q14/9M14

Actual vs. Expectations WCT’s 9M14 core net profit of RM103.6m came in below expectations; making up 64% and 63%, of our and market estimates, respectively.

 The negative variance was due to lower-than-expected EBIT margins in both construction (9M14: 7% vs 10%) and property (17% vs 22%) divisions.

Dividends  None as expected.

Key Results Highlights

 QoQ, 3Q14 revenue was up by 17% driven by construction division’s higher turnover (+46%) amidst construction progress. However, WCT’s net profit declined 45% on the back of lower margins for both construction and property divisions. As for construction, EBIT margins dropped to 5% from 8% dragged down by additional costs (approximately RM8.0m) incurred in completing New Doha International Airport project. Meanwhile, for property division, margins eroded to 13% from 19% as a result of slower billings and higher costs.

 Similarly, 3Q14 core net profit fell by 51% YoY and 21% YTD, dragged down by lower margins for both construction and property divisions.

Outlook  Although the group has strong orderbook of RM3.5b (external: RM2.3b), which will drive the group’s top line in the next 3 years, we reiterate our concerns over the group’s earnings outlook on the following factors: (i)flattish property sales due to slowdown in property market and (ii) declining trend in construction and property margins.

 Nonetheless, management also updated that the group’s tenderbook currently stands at RM3.1b driven by some major domestic projects namely Kwasa Damansara earthworks (RM1.0b), Petronas RAPID works, TRX, Warisan Merdeka and infrastructure jobs in Qatar (RM1.0b).

Change to Forecasts Revised downwards FY14-FY15 earnings forecasts by 19% each to reflect the declining margins in both construction (adjust from 10% to 7%) and property (adjust from 22% to 20%) divisions. Post adjustments, our FY14-FY15E EBIT margins dropped to 12% from 15% previously.

Rating Maintain MARKET PERFORM

 While we are wary on the group’s earnings outlook, the group might surprise us with significant new contract flows in the near-to-medium term given its strong tenderbook of about RM3.1b.

Valuation  Post-earnings revision, our SoP-based TP is adjusted lower to RM2.02 (from RM2.27), implying fwd-PER of 18.0x FY15 FD EPS.

Risks to Our Call Significantly higher-than-expected new contracts flows

 Higher-than-expected construction margins

 Higher-than-expected property sales.

Source: Kenanga