WCT’s 9M16 CNP of RM73.9m came in below expectations, making up 53%/56% of our/streets’ full-year estimates, due to our overly optimistic margin assumptions for its construction division. No dividends declared as expected. Post results, we reduced our FY16E CNP by 24%, while keeping our FY17E CNP unchanged. Maintain UNDERPERFORM with an unchanged SoP-driven Target Price of RM1.58.

Below expectations. Its 9M16 CNP of RM73.9m was disappointing as it only accounted for 53% and 56% of our and streets’ full-year estimates, respectively. The disappointment in earnings mainly stems from our overly optimistic margin assumptions for its construction division underpinned by higher local job contents. No dividend declared as expected.

Results highlight. 9M16 CNP saw a strong growth of 163% YoY due to several aspects, i.e. (i) strong revenue growth of 29% mainly underpinned by its construction division, which saw revenue growth of 44%, (ii) improved operating profit from its development (+10%) and property investment division (+31%) driven by the improvements in operating margin by 6ppt-9ppt to 27%-45%, respectively, and (iii) a huge reduction in financing costs by 45%.

QoQ, 3Q16 CNP declined by 8% in tandem with the 29% decrease in revenue, dragged by its construction division due to slower progressive billings from existing projects.

Earnings forecast. Post results, we slashed our FY16E core earnings by 24%, as we factor in a lower construction margin of 7% as we take into account higher construction costs due to costlier building material prices. However, we kept our FY17E CNP unchanged with a view that its margins would improve as most of its local jobs pick up pace. To recap, our earlier construction operating margin assumption was rather optimistic at 10% previously.

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

Maintain UNDERPERFORM. No changes to our UNDERPERFORM call, with an unchanged SoP-driven TP of RM1.58. We reiterate our view that the change in major shareholding still poses a major uncertainty for the group in terms of business directions in the midto-long-term, and we are still anticipating possible cash calls for its working capital considering they have debt covenants to be met. Hence, we continue to maintain our UNDERPERFORM call on the stock.

Source: Kenanga Research - 22 Nov 2016