FY17 CNP of RM114.4m is below our/consensus’ full-year estimates at 77%/78%. The 3.0 sen dividend proposed is above our expectation. Lowered FY18E earnings by 15% and introduced our FY19E earnings of RM168.3m. Maintain OUTPERFORM with a lower SoP-driven Target Price of RM1.90 (previously, RM1.95).

Below expectations. FY17 CNP of RM114.4m was below expectations, accounting for 77%/78% of our and consensus’ full-year estimates. Our CNP of RM114.4m is derived after i) stripping off revaluation gains of RM225.3m, adding back unrealised forex losses of RM20.5m and impairment losses of RM164.8m. The disappointment was caused by unexpected losses from its joint-venture. Positively, management is proposing a dividend of 3.0 sen while we did not expect any for the year.

Results highlight. FY17 CNP of RM114.4m grew 35%, YoY. The improvement came from its construction division, which registered significant improvement in operating margins (before impairment) to 11% (+6ppt) thanks to better contribution from local projects. On QoQ basis, it registered CNL of RM0.8m compared to CNP of RM40.0m in 3Q17 due to higher interest expenses (+61%) and losses from joint- venture.

Outlook. Its outstanding order-book currently stands at c.RM5.2b providing earnings visibility for the next 2.5-3.0 years and we expect its performance to see further improvement after the impairment on its Middle East project. As for its property division, unbilled sales and unsold completed property stocks stand at c.RM700.0m collectively and management intend to continue with their re-pricing strategy to clear existing inventories. That aside, we also expect: (i) land sales, (ii) placement exercise, and (iii) listing of its property investment assets in the near future as part of their de-gearing exercise.

Cut FY18E by 13%. Post results, we lowered our FY18E earnings by 13% after adjusting margins for both its construction and property divisions as our previous assumptions were slightly too aggressive. At the same time, we also roll out our FY19E earnings of RM168.3m.

Maintain OUTPERFORM. Despite the downgrade in earnings, we are still keeping our OUTPERFORM call on WCT but with a lower SoP- driven Target Price of RM1.90 (previously, RM1.95) as we believe that the worst could be over after the impairment on its Middle East projects, and we laud the new management team for their continuous efforts in improving the company’s profitability i.e. (i) securing more local construction jobs, (ii) re-pricing strategy to clear of its property inventories, and (iii) de-gearing plans through land sale, placement exercise and potential listing of investment assets. Our TP implies FY18E PER of 18.3x, in line with the big boys’ range of 18.0-20.0x which we are comfortable with, especially for concession owners.

Risks to our call include: (i) lower-than-expected margins/order-book replenishment, and (ii) lower government spending on infrastructure projects.

Source: Kenanga Research - 27 Feb 2018