WCT’s retail malls are poised for positive rental reversions. It has also set ambitious targets for order book replenishment of RM3b in FY23 and new property launches of RM2.75b over the next two years. We maintain our forecasts but raise our TP by 30% to RM0.60 (from RM0.46) after recalibrating our valuations for its investment properties. Upgrade to OUTPERFORM from MARKET PERFORM.

The key takeaways from WCT’s post-results briefing yesterday are as follows:

1. WCT revealed that its FY22 property sales came in at RM421m, slightly below our FY22 target of RM550m (as well as the company internal target of RM600m) supported by launches worth RM68m. Its unbilled sales stood at RM273m as at end FY22 and WCT intends to put onto the market RM2.75b worth of new launches over the next two years. In FY23, it targets to monetize 52 acres of land in Klang worth RM350m-RM380m and continue clearing low-margin inventories which stood at RM368m as at FY22 (down by 28% from RM506m at the start of the year).

2. For construction, it is targeting to replenish RM3b worth of new jobs (versus our RM1b assumption) in FY23, as most of its ongoing jobs worth RM3.5b in FY22 are reaching completion. Key projects the group aims to secure include: (i) MRT3, (ii) ECRL, (iii) Pan Borneo Highway, (iv) Subang Airport Expansion, (v) flood mitigation, and (vi) Kuching urban transport system. Aside from local jobs, it is also looking out to the international markets such as Middle East and Indonesia for new replenishment.

3. With improving footfall and tenant sales, WCT expects positive rental reversions at its mall, i.e. Paradigm Petaling Jaya and Gateway@klia2 which should boost its numbers from 1QFY23 onwards.

4. Hotels under its stable, i.e. Le Meridien, Petaling Jaya (formerly known as New World Hotel) and Premiere Hotel, Klang, have registered increased occupancy rates. Nonetheless, they are likely to remain in the red (albeit with narrowing losses) due to the intense competition. It has set a breakeven target for these hotels in the next 2-3 years. Meanwhile, WCT will be opening a new 200-room hotel known as Hyatt House at its Paradigm Johor Bahru mall in 2QFY23.

5. Despite the improved performance observed across all its business divisions, challenges from: (i) manpower shortage, (ii) higher electricity costs, and (iii) higher input costs arising from inflation still remain.

While WCT has set high replenishment and launch targets, we observe that the group has historically fall short of its targets. Therefore, we maintain our FY23F numbers based on unchanged replenishment assumptions of RM1.0b and property sales target of RM600m.

Upgrade to OUTPERFORM (from MARKET PERFORM) with an increased SoP-based TP to RM0.60 (from RM0.46) after recalibrating our valuations for its investment properties. Our SoP-TP is based on: (i) a 9x construction PER, at the lower end of our coverage’s PER range of 9-18x given its historically thin margins on poor budgeting, and (ii) a 90% discount to its property RNAV, vs. 60%-65% ascribed on peers to reflect the low realisability of WCT’s GDV. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like WCT for: (i) the improved prospects of the local construction sector with the anticipated rollout of public projects, and (ii) the rising occupancy and hence rental incomes, profitability and valuations for its malls and hotels as the pandemic comes to an end, thus, making the monetisation of these assets via a REIT more plausible.

Risks to our call include: (i) a prolonged slow property market, (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 Mar 2023