WCTs FY23 results disappointed. It dipped into a huge loss in FY23 on reversal of RM209.4m construction profits. However, we believe it is bracing for a much better time ahead on the roll-out of sizeable public infrastructure jobs. We cut our FY24F net profit forecast by 24%, reduce our TP by 6% to RM0.66 (from RM0.70) but maintain our OUTPERFORM call.

WCT disappointed with a FY23 net loss of RM254.1m vs. our forecast of a RM9.2m net profit and the consensus estimate of a RM57.5m net profit. The variance against our forecast came largely from a lumpy RM209.4m reversal of construction profits owing to prolongation and escalation in input and labour costs. It did not declare any dividend for FY23 vs. our assumption of 0.5 sen.

YoY. Its FY23 revenue declined 18% from a high base in FY22 (on lumpy land sales of RM214m) coupled with weak construction billings (-22%). It posted a net loss of RM254.1m on the said reversal of construction profits vs. a net profit of RM128.7m in FY22.

QoQ. Its 4QFY23 revenue contracted 19% due to lower construction revenue (-37%) on the slower construction progress. Its net loss widened from RM13.5m to RM245.9m mainly due to the reversal of construction profits mentioned above.

Outlook. While it has not secured any new key jobs in FY23, 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 Dec 2023, its outstanding order book stood at RM2.72b from RM3.04b three months ago, while its tender book stands at >RM12b currently.

Forecasts. We cut FY24F earnings forecasts by 24% to account for (i) higher input cost; and (ii) lowering job replenishment assumption to RM1.0b from RM1.5b. We also introduce our FY25F numbers with earnings projected to grow by 18% on the back of job replenishment assumption of RM1.5b. We project 0.5 sen NDPS for both FY24F and FY25F.

Valuations. We reduce our SoP-driven TP by 6% to RM0.66 (see Page 3) from RM0.70 as we roll over our valuation base year to FY25F (from FY24F) with an unchanged: (i) 10x construction FY25F 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).

Investment case. 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 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 - 1 Mar 2024