WCT’s 1HFY22 CNP missed expectations due to weak performance from its property development business. Meanwhile, YTD, its construction unit has yet to win any new job. We slash our FY22F and FY23F earnings by 73% and 63%, respectively, to reflect weaker property development profits and lower construction job wins. We also lower our TP by about a third to RM0.43 (from RM0.62) and downgrade our call to MARKET PERFORM from OUTPERFORM.

Below expectations. 1HFY22 CNP of RM26.3m (adjusted for taxation gain of RM63m) came in below expectations at only 30% of our full-year forecast and 41% of the full-year consensus estimate. The variance against our forecast came largely from losses at its property development division as low billings from largely low-margin products were insufficient to fully absorb the unit’s overheads.

YoY, 1HFY22 revenue rose 33% on improved performance across the board (construction, property development and property investment) on the back of the economy reopening. However, CNP shrank by 16%, dragged down poor performance at the property development division as mentioned.

Outlook. With RM266m property sales in 1HFY22, WCT is on track to meet our full-year assumption of RM550m (but trails its own target of RM1b). WCT plans to launch RM2.8b worth of properties over the next two years comprising residential and commercial products at: (i) Hilltop 2, Mont Kiara (GDV: RM798m), (ii) W City OUG (RM927m), (iii) W City, Johor (RM1b), and (iv) Adenia (RM68m). We are more inclined to believe that it will have to defer some of them given the soft market condition which is likely to persist over the medium term. Its unbilled sales stood at c.RM450m at as end-2QFY22 (vs. RM240m three months ago).

Meanwhile, YTD, its construction division has yet to secure any new job vs. our assumption as well as its own target of RM1b for the full year. As at end-2QFY22, its outstanding construction orderbook stood at c.RM4b (vs. a peak of RM6.4b during the last upcycle in 2018).

We slash our FY22F and FY23F earnings by 73% and 63%, respectively, to reflect: (i) weaker performance from its property development division, and (ii) lower construction job wins assumption of RM500m in FY22F (from RM1b). We lower our TP by about a third to RM0.43 (from RM0.62) as we rationalise our valuation basis for its property development unit to RNAV (at a 90% discount, vs. 60-65% for peers to reflect the low realisabiliy of WCT’s GDV) from 0.3x PBV previously. There is no adjustment to our TP based on ESG given a 3-star as appraised by us (see Page 5). Downgrade to MARKET PERFORM from OUTPERFORM.

Risks to our call include: (i) a prolonged property market downturn, (ii) sustained weak flows of construction jobs from both the public and private sectors, (iii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and (iv) rising cost of building materials.

Source: Kenanga Research - 1 Sept 2022