Period

3Q15/9M15

Actual vs. Expectations

9M15 core net profit of RM28.0m is below expectations, accounting for only 19% and 23% of our and streets full-year estimates, respectively. The negative variance was mainly due to several factors, i) an overly aggressive recognition assumption on its progressive billings for outstanding orderbook, ii) lower-than-expected construction margin and iii) higher-than-expected financing costs.

Dividends

No dividend was declared in 3Q15.

Key Results Highlights

YoY, 9M15 net profit of RM149.9m improved by 50% despite a 14% decline in revenue, driven mainly by an unrealized forex gain of RM121.9m arising from its overseas project. However, stripping this item, we would derive a 9M15 core net profit of RM28.0m (-73%) inline with the decline in revenue due to slower progressive billings from both construction and property divisions. That aside, it was also due to the contraction in construction operating margin from 9% to 4%, higher effective tax of 61% after stripping off its unrealized forex gain and also an increase in finance costs of RM60.7m (+36%).

QoQ, WCT still managed to record core net profit of RM6.9m (+7%) in 3Q15 despite the slide in revenue (-12%), thanks to its property division which saw a significant improvement in operating margin to 22% from 11% previously.

Outlook

While its outstanding orderbook of RM4.3b will easily provide three years of visibility, we are concerned on the execution of these contracts, as labor issue could further bog down its construction margins.

Nonetheless, we believe that WCT are still eyeing for more earthworks and building related projects in 2016. Hence, we raised our FY16 orderbook replenishment assumptions by another RM1.0b.

Change to Forecasts

We lowered FY15-16E core net profit by 74%-48% to RM39.3-84.2m. In our earnings revision, we pushed back some of its construction billings, lowered construction margins, and increase financing cost.

Rating

Downgrade to MARKET PERFORM

Valuation

Following our earnings downgrade, we are lowering our SoP-based TP to RM1.51 @ 20% discount (previously, RM1.81). Our TP implies a Fwd. PER of 21.6x, which is rich compared to other big cap contractors. Hence, we are downgrading the stock to MARKET PERFORM from OUTPERFORM, previously.

Risks

Lower-than-expected new contracts flows

Lower-than-expected construction margins

Lower-than-expected property sales

Source: Kenanga Research - 25 Nov 2015