Period  4Q14/FY14

Actual vs. Expectations  FY14 core net profit of RM120.5m came in below expectations, making up 91% and 81%, of our and market estimates, respectively.

 The negative variance was due to lower-than-expected: (i) construction margins, (ii) property margins, and (iii) property investment income which we believe were dragged down by higher costs from KLIA2 Integrated Gateway.

 On the flip side, the group secured RM994m worth of new contracts in FY14 which is in line with our assumption of RM1.0b.

Dividends  Below expectation. Final DPS of 2.7 sen was declared. In total, WCT has declared 6.2 sen DPS, lower than our forecast of 7.5 sen.

Key Results Highlights  QoQ, 4Q14 revenue and core net profit declined by 32% and 17%, respectively, dragged down by: (i) weak construction and property revenue following slower billings, and (ii) poor construction margins. Construction EBIT margins eroded to 3% from 6% mainly due to lower margins achieved in local building projects.

 YoY, 4Q14 core net profit recovered to RM17.0m from mere RM2.3m in 4Q13 due to low base effect. To recap, WCT made about RM30m provisions for its construction division in 4Q13.

 YTD, while FY14 revenue was flat (-1%), core net profit declined by 10% dragged down by poor construction margins and slower property billings.

Outlook  While we like the group for its strong orderbook of RM3.1b (external: RM2.0b), which will drive the group’s top line in the next three years, we reiterate our concerns over the group’s earnings outlook on the following factors: (i) declining trend in construction and property margins, and (ii) flattish property sales due to slowdown in property market.

 Nonetheless, the group’s tenderbook currently stands at RM2.3b driven by some major domestic projects namely Petronas RAPID works, TRX, and KL118 (Warisan Merdeka).

Change to Forecasts  Following consecutive rounds of earnings disappointments, we have opted to lower our FY15E core earnings by 8.1% after adjusting lower: (i) our construction EBIT margins assumption to 6% from 7%, and (ii) property EBIT margins assumption to 19% from 20%. We also introduce our FY16E earnings of RM151.7m, representing 6.8% growth. Note that we assume WCT to secure new contract worth RM1.0b and RM1.5b in FY15 and FY16, respectively.

Rating Maintain MARKET PERFORM

Valuation  We lower our SoP-based TP to RM1.73 from RM2.02 previously after: (i) earnings revision, and (ii) widening our SoP discount to 20% from 10% after observing persistent earnings disappointment. Our new TP implies fwd-PER of 13.3x FY15 EPS, in line with its 5-year historical average fwd-PER.

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

 Higher-than-expected construction margins

 Higher-than-expected property sales. 

Source: Kenanga