WCT disappointed in 9MFY23 with a loss on the heels of prolongation costs of construction projects secured prepandemic. While it has yet to secure any key project in FY23, we believe it is poised to benefit from the imminent roll-out of mega public infrastructure projects. We cut our FY23-24F net profit forecasts by 74% and 9%, respectively, lower our TP by 5% to RM0.70 (from RM0.74) but maintain our OUTPERFORM call.

WCT disappointed, reporting a core loss of RM8.2m in 9MFY23 vs. our RM35.4m full-year net profit forecast and a RM55.0m consensus net profit estimate. The variance against our forecast came largely from prolongation costs of construction projects secured prior to the pandemic. No dividend was declared during the period as expected as it normally only pays a final dividend in the last quarter.

YoY. Its 9MFY23 revenue fell 19% from a high base a year ago (on lumpy land sales of RM214m) coupled with weak construction billings (-16%). It posted a core net loss of RM8.2m on prolongation costs from construction projects as mentioned above (vs. a core profit of RM38.8m in 9MFY22 underpinned by land sale gains of RM56m and and RM57m tax reversal).

QoQ. Despite revenue rising 27% driven by higher construction revenue (+27%), it registered a core net loss of RM13.5m (vs. a core profit of RM13.0m three months ago) due to the prolongation costs, coupled with the half-yearly distribution of profits of RM24.3m to the holders of its Perpetual Sukuk.

It has yet to secure any new key jobs in FY23 against our RM1b replenishment assumption and the even more aggressive internal target of RM3b. However, we believe it is poised for a better FY24 on the impending roll-out of various public infrastructure projects such as: (i) MRT3, (ii) Bayan Lepas LRT, (iii) Pan Borneo Sabah, (iv) Subang Airport expansion, and (v) various government hospitals. As at endSep 2023, its outstanding order book stood at RM3.04b, while its tender book stands at >RM12b currently.

Forecasts. We cut FY23-24F net profit forecasts by 74% and 9%. respectively to account for lower construction margins. Nonetheless, we keep our 0.5 sen NDPS unchanged.

Correspondingly, we trim our SoP-driven TP by 5% to RM0.70 (from RM0.74) based on an unchanged: (i) 10x construction FY24F PER, which is at a discount to 18x we ascribed to mid-sized to large contractors given WCT’s much smaller size, and (ii) a 85% discount to its property RNAV, vs. 30%-50% 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 post pandemic, 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 - 24 Nov 2023