Yesterday, MRT Corp awarded WCT the MRT 2 viaduct V204 work package worth RM896.4m. We are neutral on the award as the contract is still within our FY16E replenishment target of RM2.5b. We make no changes to FY16-17E earnings. Downgrade WCT to UNDERPERFORM (from MP) with unchanged TP of RM1.58 as its recent share price rally has exceeded our target price and its high gearing remains a concern.

News. Yesterday, WCT bagged the V204 viaduct work package for MRT2 worth RM896.4m. The contract entails construction of the viaduct guideway and other associated works from Bandar Malaysia’s south portal to Kampung Muhibbah. Although timeline of the contract was not disclosed, we expect the contract completion in the next 4-5 years.

Neutral on award. We remain neutral on the award as WCT’s effective contracts secured YTD worth RM1.4b is still within our FY16 replenishment target of RM2.5b; with a remainder of RM0.9b to be achieved till year-end. Assuming a pre-tax margin of 8% and contract duration of 4 years, we can expect the contract to contribute c.RM13.4m/annum to bottom line.

Earnings forecast. We make no changed to our FY17-18E earnings forecast as we have anticipated and already factored in RM2.5b orderbook replenishment in our earnings model.

Company Outlook. Currently, WCT has an external outstanding orderbook of c.RM5.2b which would provide earnings visibility for the next 2.5-3.0 years. Job prospects currently underpinned by contracts from LRT3, Kwasa Damansara and TRX, which is likely to flow in from FY17.

Downgrade to UNDERPERFORM. We downgrade WCT to UNDERPERFORM (previously MP) with an unchanged TP of RM1.58 based on SOP. Our downgrade follows the recent rally in stock price after WCT co-founders’ entire stake sale to Tan Sri Desmond Lim, which caused share price to exceed our target price. Furthermore, we are not excited with WCT’s co-founders exit as the change in major shareholder poses more uncertainty for the group in terms of business directions in the mid-to-long term. That said, we remain concerned over WCT’s high net gearing (0.8x as of 1H16) which could lead to possible cash calls for its working capital considering they have debt covenants to be met. To recap, WCT undertook a rights issuance to raise up to RM143.0m last year for its working capital.

Source: Kenanga Research - 10 Nov 2016