WCT’s 1H17 CNP of RM75.1m is within expectations accounting for 51%/50% of our and streets’ full-year estimates, respectively. No dividends declared as expected. No changes to our FY17-18E core earnings. Upgrade to MARKET PERFORM with an unchanged SoP-driven Target Price of RM1.83 given the share price correction while earnings outlook appears steadier.

In line. 1H17 Core Net Profit (CNP) of RM75.1m was within expectations accounting for 51%/50% of our and streets’ full-year estimates, respectively. We derived our CNP of RM75.1m by adding back its cumulative forex losses of RM20.5m. No dividends declared as expect.

Results highlight. Its 1H17 CNP recorded an impressive YoY improvement of 33% despite 20% decline in revenue. This is mainly driven by the following factors; (i) significant improvements seen in construction operating margins from 4% to 8% as its local jobs that commands higher margins picked up pace, and (ii) improvements in property investment operating margins by 7ppt to 54%. On QoQ basis, WCT managed to maintain a flattish 2Q17 CNP of RM37.7m (+1%) despite 19% decline in revenue. The main drag on its revenue was due to the steep decline of 38% in construction revenue. Fortunately, the negative impact was negated by better contribution from its property and property investment division, which saw 31%/13% growth in operating profit underpinned by 75%/3% growth in both property and property investment revenue. The sharp increase in property revenue is in-line with management’s strategy to clear its inventory /unsold GDVs. Positively, its net gearing had also come off to 0.86x from 0.95x in 1Q17.

Earnings. Post 1Q17 results, we make no changes to our FY17-18E earnings of RM146.9m and RM165.3m, respectively.

Outlook. Its outstanding order book stands at c.RM5.0b, providing earnings visibility for the next 2.5-3.0 years. Going forward, we expect WCT to maintain its earnings momentum and also anticipate them to bag more jobs from LRT3 on the viaduct packages in the medium-term. As for its property division, we are looking for an update in its upcoming analysts’ briefing that is to be held today.

Upgrading to MARKET PERFORM. We raised our recommendation to MARKET PERFORM (previously, UNDERPERFORM) with an unchanged SoP-driven Target Price of RM1.83, in view of its steady earnings performance coupled with the fact that its share price has weakened by 14% since our last report dated back in 30th May 2017. Our TP implies FY18E PER of 18.5x in line with the big-boys range of 18.0-20.0x, which we are comfortable with especially when they are concession owners. Meanwhile, it appears that earnings trajectory appears steadier while there is an improvement in its balance sheet position.

Source: Kenanga Research - 25 Aug 2017