WCT’s 1HFY23 results met our expectations but disappointed the market. Its 1HFY23 net profit plunged 80% YoY from a high base a year ago (buoyed by land sale gains and tax reversal). Going forward, its earnings will be underpinned by RM3.13b outstanding construction order book. We maintain our forecasts, fine-tune up our TP to RM0.61 (from RM0.60) and keep our OUTPERFORM call.

WCT’s 1HFY23 core profit of RM5.3m only made up 15% of our full year forecast. However, we consider the results within our expectation as we expect a stronger 2H as construction work stage accelerates. Meanwhile, at only 7% of the full-year consensus estimate, we consider the results below market expectations.

No dividend was declared during the period as expected as it normally only pays a final dividend in the last quarter.

YoY. Its 1HFY23 revenue fell 29% from a high base a year ago which was boosted by lumpy land sales. Similarly, its core profit plunged 80% from a high base boosted by land sale gains and RM57m tax reversal.

QoQ. Its 2QFY23 revenue rose 5% mainly driven by higher property development revenue (+102%). Meanwhile, it reported RM13.0m core net profit vs. core loss of RM7.7m in the preceding quarter (which was hit by the distribution of profits to the holders of its Perpetual Sukuk).

So far this FY, its construction division has yet to secure any new key jobs against our RM1b replenishment assumption and its much more aggressive internal target of RM3b. However, we believe it is premature to write WCT off given the imminent roll-out of various public infrastructure projects such as: (i) MRT3, (ii) Pan Borneo Sabah, (iii) Subang Airport expansion, and (iv) various government hospitals. As at end-Jun 2023, its outstanding order book stood at RM3.13b, while its tender book stands at >RM10.6b currently.

Forecasts. Maintained.

We raise our SoP-driven TP slightly to RM0.61 from RM0.60 as we roll forward our valuation base year to FY24F (from FY23F). This revised TP is anchored by: (i) a 9x construction forward PER, at the lower end of 9x-18x we ascribed to mid-sized and large contractors given WCT’s less impressive track record in earnings delivery, 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 5).

We like WCT for: (i) the improved prospects of the local construction sector with the anticipated roll-out 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. Maintain OUTPERFORM.

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

Source: Kenanga Research - 30 Aug 2023