4QFY20 CNL of RM27.5m dragged FY20 to a loss of RM18.2m which disappointed due to: (i) weaker-than- expected margins, and (ii) the absence of an anticipated land sale. That said, 1 treasury share dividend for every 100 shares surprised on the upside. Despite slashing margin assumptions, we increase FY21E earnings to RM93m (+21%) after factoring for higher land sales worth RM134m vs RM50m previously. Nonetheless, we downgrade WCT to MP with a lower TP of RM0.65 as its share price has rallied strongly recently coupled with its debt levels which are at all-time high.

Severely disappointing. 4QFY20 CNL* of RM27.5m dragged FY20 into a loss position of RM18.2m which disappointed both our and consensus expectations. The negative deviation was due to: (i) weaker- than-expected margins from construction and property segments, and (ii) the absence of an anticipated land sale worth RM50m. The declared one (1) treasury share dividend for every 100 shares held surprised on the upside against our expectations of no dividends.

*WCT reported headline loss of RM200m in 4QFY20. To derive the core profit, we cumulatively reverse out one-off losses of RM173m from: (i) FV loss on investment properties worth RM104.3m, (ii) inventories and land written down worth RM47.24m, (iii) write-down in New World Hotel worth RM17.7m, and (iv) impairment of intangible assets worth RM3.4m.

Highlights. QoQ, 4QFY20 sank into the red mainly due to the severe drop in margin from their construction division (-12ppt) coupled with the property development division suffering a loss due to weak revenue (- 43%) which failed to cover fixed costs. YoY, FY20 CNL of RM18.2m was mainly due to the Covid-19 pandemic which affected productivity.

Outlook. We have targeted RM750m worth of replenishment in FY21 backed by WCT’s tender-book of RM10b. Meanwhile, its outstanding order-book of RM5.0b provides c.3.5x cover. For its property division, WCT has outstanding land sales worth RM134m targeted for completion in 1HFY21. We have set our FY21E sales target at RM550m (excluding land sales) backed by RM1.5b worth of launches from Mont Kiara, OUG, Klang and Johor.

Earnings revision. Post results, despite accounting for lower margins for their construction and property divisions, we raise FY21E earnings by 21% to RM93m (from RM77m) after factoring in higher land sales of RM134m against initial target of RM50m. The higher land sales projected for FY21 is from delayed land sale we had earlier anticipated to be concluded in FY20. Note that the FY21E land sale of RM134m cascades down to RM47m earnings in our FY21E forecast. We consider land sales as core profits given that WCT has been consistently selling land for the past three years.

Meanwhile, we introduce FY22E earnings of RM86m backed by sales and replenishment assumptions of RM550m and RM750m, respectively (same assumptions as FY21E).

Downgrade to MARKET PERFORM on lower TP of RM0.65 (from RM0.71) based on unchanged FY21E PBV of 0.3x (-1.5SD). Our downgrade is premised on: (i) WCT’s strong share price which has appreciated 45% since our last quarterly report, and (ii) reduction of its book value, attributed to huge assets impairments this quarter. Due to the huge impairments, WCT’s net gearing (perpetual sukuk considered as borrowings) is currently at its peak at 1.1x – placing them in a precarious position.

Source: Kenanga Research - 18 Mar 2021