Despite prevailing uncertainties amidst the recent resurgence of the pandemic, WCT remains optimistic of achieving their targeted contract replenishment of RM2.0b and property sales target of RM1.0b set earlier this year. Meanwhile, rising steel prices remain manageable for its construction division but property margins will remain suppressed in the near term due to clearing of old inventories that carry lower margins. On lowered FY21 earnings due to the fresh lockdowns, OP call and TP of RM0.64 are maintained.

1QFY21 property sales of RM100m deemed in line with our RM550m target. That said, management is aiming for a higher sales target of RM1.0b. They are keeping their high sales target despite having scaled back initial planned launches of RM1.7b to RM0.8b after deferring launches for Hilltop 2, MK (GDV: RM680m) and W City (GDV: RM280m) to FY22. Management revealed as of late May 2021, they have achieved total sales of RM0.3b.

However, in light of the deferred launches coupled with the fresh lockdowns announced over the weekend, we still find management’s target a tad bullish which aims for sales of RM0.3b and RM0.4b in 3QFY21 and 4QFY21, respectively, (bringing full-year target to RM1.0b). Hence, we choose to remain conservative and keep our target of RM0.55b unchanged for now.

Property contributions to remain weak in the near term. In the subsequent quarters, its property division’s contributions will remain insignificant (or even posting a loss) as the group focuses on selling completed inventories which carry much lower GP margins – hindering the group from covering fixed operating and financing cost. The low margins are the result of multiple impairments (done previously) in order to drive sales in favour of cash. We will only see margins gradually improve once billings from new projects kicks in during more advanced construction stages. Meanwhile, potential land sales would provide earnings support for this division. Current unbilled sales stood at RM184m.

For construction, management is still confident in securing RM2b worth of replenishments backed by a tender-book of RM10b. We believe the replenishment focus will largely come from East Malaysia (i.e. Sabah) from contracts such as: (i) Pan Borneo highway and (ii) Sabah-Sarawak link road. YTD, WCT has clinched RM580m worth of contracts. However, we are less optimistic and believe the resurgence of Covid-19 cases will see slower roll-out of public projects this year. Hence, we choose to keep our target replenishment of RM1.0b.

Steel prices still manageable. Meanwhile, management is not overly concerned on the rising steel prices as steel only makes up 6-7% of their building jobs’ cost (and only 1-2% for infrastructure jobs). Moreover, not all building jobs are affected as steel is only consumed heavily during the structural stage – which some of its ongoing projects already passed.

Earnings outlook. In view of the total lockdown imposed by the government over the weekend – which would see complete work stoppages for two weeks and slower productivity in the subsequent weeks to follow, we cut our FY21 earnings down by 8% after imputing 3-week worth of revenue loss for its construction division.

Maintain OP with an unchanged TP of RM0.64 based on unchanged FY22E PBV of 0.3x (-1.5SD). We find the current PBV valuation of 0.22x appealing in view of a potential rebound post pandemic.

Source: Kenanga Research - 31 May 2021