We left WCT’s results briefing feeling more cautious due to the challenging business environment in the construction and property sectors. Reduced FY18-19E earnings by 17-13%. Positively, its divestment of investment properties through the listing of WCT REIT is back on track, thanks to the settlement with Aeon. Maintain OUTPERFORM with a lower SoP-driven Target Price of RM1.10 (previously, RM1.20) post review of earnings.

Staying cautious. Post briefing, we are more cautious with WCT’s near-term prospects due to the delays in infrastructure projects albeit its all-time high outstanding order-book of c.RM7.0b. That said, its property division will continue to see more challenges due to the weak market sentiment which dampens management’s effort in clearing their existing inventories amounting to a GDV of RM865.0m. To recap, they only registered 9M18 property sales of RM123.0m, which is disappointing compared to our/management’s sales target of RM250.0/300.0m.

Construction. To date, WCT has secured RM2.3b worth of jobs beating our and management’s full-year target of RM2.0b bringing its outstanding order-book to an all-time high of c.RM7.0b. However, management indicated that future margins would trend down as their newly secured building contracts command lower margins compared to infrastructure works. Currently, its outstanding order-book is made up of 37% building work, and 63% infrastructure works. Moving into 2019, management are still actively tendering for more jobs with its current tender-book in excess of RM4.5b. However, the replenishment quantum might not be as high as RM2.0b as management are more selective with future jobs.

Property is the Achilles heel for WCT as they have missed their target sales of RM300.0m, recording only RM123.0m sales for 9M18. Furthermore, it has amassed huge inventories of RM865.0m with the recent completion of Sapphire Paradigm (GDV: RM270.0m). We concur with management’s view that it would be a challenging task in clearing the inventories as bulk of the properties is priced above >RM500.0- 600.0k, coupled with the fact that 29% of them are from Medini where property sentiment at its weakest due to the oversupply situation in Johor. Nonetheless, management remains determined and might even consider offering a steeper discount to clear of its inventories. Going forward, we are only expecting property sales of RM143.8-187.6m for FY18-19 (previously, RM250.0-300.0m).

De-gearing remains a long-term affair. WCT has long talked about its de-gearing exercise plans, i.e. (i) equity fund raising, (ii) monetisation of investment assets, (iii) clearance of inventories, and (iv) disposal of lands prior the change in major shareholder. Positively, its WCT REIT is back on track due to the recent settlement of its Bukit Tinggi Mall with Aeon, and management is hopeful that the listing of its REIT could take place in 2H19 should there be no more hiccups or black swan events.

Downgrades FY18-19 estimates. Post briefing, we lowered our FY18- 19E earnings by 17-13%, respectively. We tweaked our construction margins lower in anticipation of higher contribution of lower margin jobs and reduced our property sales target from RM250.0m to RM143.8m.

Maintain OUTPERFORM. We lowered our SoP-driven Target Price to RM1.10 (previously, RM1.20) after our downward revision in construction earnings and adjustments in our property RNAV with a wider discount of 75% (previously, 70%). However, we reiterate our OUTPERFORM call on the stock for being on an improving trajectory in such challenging times, and for the management determined in performing a herculean task of turning the company around especially its property division. Our current TP implies FY19E PER of 10.5x, which is the -1.5SD-level from its 3-year mean and also closer to its through levels.

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

Source: Kenanga Research - 28 Nov 2018