We came back from WCT’s briefing feeling less assured with its near-term prospects due to i) slow billings from its construction division due to LRT3, and ii) weak contribution from its property development division due to the soft market. We cut our FY19-20E CNP by 25%-15%. Maintain UP with a lower SoP-driven TP of RM0.815 (from RM0.850).

Construction. Management maintains the order-book replenishment target of RM1.0b, backed by tender book of RM5.3b of which 42% from local civil and infrastructure jobs, while the remaining 58% are from local building jobs. Management is more confident in securing jobs in the building segment over civil and infrastructure segment. That aside, management is also actively looking for opportunities in Sarawak, should there be more work packages for Coastal highway. In terms of work progress, LRT3 remains slow as the final cost and design are only expected to be finalised by 4Q19.

Property development. Its inventory stands at GDV: RM918.0m, and the clearance of inventories remains one of management’s core focuses. Apart from that, management is also in active discussion on more land disposals primarily from Klang and Sg. Buaya totalling to c.RM400.0m as part of its de-gearing effort. We opine that management’s priorities are in the right direction. However, disposals of land and clearance of inventories might take longer than expected due to the current soft property market.

Property investment. As for its property investment division, management is relieved that it has finally confirmed renewal with Aeon on their Bukit Tinggi Mall, which paves way for its planned listing of WCT REIT, which comprises Paradigm Mall PJ, AEON Mall, Premiere Hotel and New World Hotel targeting to raise proceeds of up to RM250.0m.

Outlook. Its outstanding order-book currently stands at c.RM6.0b providing earnings visibility for the next 2.5-3.0 years. We hope that the final cost for LRT3 and MRT2 to be finalised soon, so that they can resume their progress in full swing, which would be a bright spot for their construction earnings.

Earnings review. Post briefing, we cut our FY19-20E CNP by 25%- 15%, as we factor in a slower billing from its, construction, property division and also tweaked our interest cost higher to be more reflective of its current rates.

Maintain UNDERPERFORM with a lower SoP-driven Target Price of RM0.815 (from RM0.850). Our current TP implies FY20E PER of 8.7x, within our ascribed price-earnings multiple range of 6-11x for contractors. Its implied multiple of 8.7x is at the mid-end is mainly due to its property investment division carries bulk of the valuation.

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

Source: Kenanga Research - 29 May 2019