1QFY20 breakeven bottom-line is within our estimate but below consensus’ due to their overly bullish assumptions amidst this Covid-19 pandemic. Maintain MARKET PERFORM on lowered TP of RM0.48 (from RM0.55) after reducing our PBV valuation to 0.2x due to growing financing obligations which puts the group in a riskier position.

Within our estimate but below consensus’. 1QFY20 breakeven bottom-line is within our FY20E profit projection of RM8m but way below consensus of RM90.4m. The negative variance from consensus is due to their overly bullish revenue assumptions and margins amidst the Covid-19 crisis. We are anticipating 2QFY20 to record losses (from MCO disruptions) before gradually improving in 2HFY20. No dividends as expected.

QoQ, 1QFY20 breakeven bottom-line deteriorated from a CNP of RM63.1m registered in 4Q19 mainly due to: (i) absence of land sale gain worth RM44m and (ii) the additional RM18.2m payment required to service perpetual sukuk holders which was issued in Sept 2019.

Likewise, 1QFY20 earnings also deteriorated YoY from a profit position of RM40.3m (in 1QFY19) for similar reasons: (i) absence of land sale gain worth RM31m and (ii) additional perpetual sukuk payment.

Outlook. Forward earnings will be underpinned by its outstanding order-book of RM6b, which represents approximately 4x of FY19 construction revenue. Still, overall prospects (winning new construction contracts and selling more properties) will remain challenging given the prevailing tough market conditions currently clouding the construction and property sectors.

Growing obligations. Overall financing instruments from borrowings and perpetual sukuk hit an all-time high of RM3.9b in 1QFY20. During the quarter, WCT had raised an additional RM205m of perpetual sukuk to fund operations. We find this slightly worrisome as total interest to service these obligations would cost the group a whopping RM180m/annum moving forward. To put things into perspective, it amounts to 71% of FY19 total EBIT of RM255m (after excluding land sales of RM75m). WCT’s net gearing is also the highest in our coverage universe at 0.98x.

Earnings unchanged post 1QFY20 results.

Maintain MARKET PERFORM on reduced TP to RM0.48 (from RM0.55) after lowering PBV valuations to 0.20x pegged at -2SD on 2- year historical level (from 0.25x PBV at -1.5SD) given the higher risks from growing financing obligations. Its high financial leverage could amplify the severity of the current downturn.

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

Source: Kenanga Research - 26 Jun 2020