1Q16 core net profit (CNP) of RM32.0m came in above our but within consensus expectations accounting for 37% and 22% of estimates, respectively. No dividend was declared as expected. Raised our FY16E and FY17E CNPs by 62% and 13%, respectively. MARKET PERFORM maintained with a higher TP of RM1.85.

1Q16 CNP of RM32.0m beat our but inline with consensus expectations, accounting for 37% and 22% of full-year estimates, respectively. Our CNP was derived after stripping off unrealised forex gains of RM23.1m. The positive variance to our estimates stemmed from our overly conservative margin assumptions for its construction division which we believe its margins would have picked up on the execution of its local earthwork related projects.

Construction works picking up pace. CNP saw a significant increase of 117%, YoY on the back of higher revenue, which improved by 38%, YoY backed by the steady progress of its on-going construction jobs secured last year. Its construction revenue was up by 51% whereas its property development and investment divisions only saw marginal improvements in revenue of 5% and 3%, respectively.

QoQ, CNP improved by 50% despite revenue growth of 7%, attributable to the improvements in construction margins (exforex losses) from 2.4% to 7.1%, coupled with the improvement in property development earnings (+72%). However, its net gearing had crept up to 0.81x from 0.79x which is above our comfortable levels of 0.5x-0.6x.

Raising FY16E and FY17E earnings by 62% and 13% to RM141.3m and RM193.5m, respectively on the back of higher construction margin assumptions (of which we were overly conservative).

Outlook. We believe WCT will be busy executing its outstanding orderbook of RM4.8b, which provides them another 2-3 years earnings visibility, while targeting another RM2.0b worth of job replenishments and RM600.0m worth of property sales. The targeted jobs replenishments are Kwasa Damansara, Pan Borneo, TRX, RAPID, highways and others; the collective tenderbook sized up to RM2.0b-RM3.0b. Major property launches would be coming from its OUG project namely Paradigm Garden City with an estimated GDV of c.RM400.0m for Waltz Residence.

Maintain Market Perform. Following the upgrade in our FY16E and FY17E earnings, we raised our SoP-driven Target Price to RM1.85 (previously, RM1.51) as we roll forward our valuation base year to FY17E. Our TP implies a Fwd. FD FY17E PER of 14.6x, which is slightly lower compared to other big cap contractors. However, its net gearing of 0.81x is exceptionally high, which is beyond our comfortable level of 0.5x-0.6x. Hence, we maintain MARKET PERFORM on the stock.

Source: Kenanga Research - 26 May 2016