WCT's 9MFY24 results matched expectations, showing broad- based improvement from the construction segment following the absence of work prolongation and cost escalation in the previous period, while higher property sales and billings pushed property earnings higher. The listing of its REIT, which is expected by 1QCY25, is the start of a re-rating exercise while several projects in the pipeline will propel its earnings prospects. Maintain OUTPERFORM with an unchanged TP of RM1.43.

9MFY24 in line. At 31%/35% of house/street's FY24 forecast, we deem 9MFY24 core profit of RM16.6m within expectations as stronger 4QFY24 earnings is expected in the absence of the distribution of profits to the holders of its Perpetual Sukuk. No dividend was declared during the period as expected as it normally pays a final dividend in the 4th quarter.

YoY. Despite revenue dipping 3% to RM1.28b, WCT reported core profit of RM16.6m in 9MFY24 from a core loss of RM8.2m in 9MFY23.

This was due to a broad-based improvement from construction and property segments due to higher sales and billing of property unit while the significant improvement in construction unit, we believe, was due to adjustments for work prolongation and escalation in raw material and labour costs previously. The decline in revenue was attributable to slower construction progress.

QoQ. While lower revenue was lower by 16%, it reported RM10.8m core loss in 3QFY24 vs. RM31.3m core profit in the preceding quarter, due mainly to the half-yearly distribution of profits to the holders of its Perpetual Sukuk. The decline in topline was mainly due to a slower construction progress coupled with lower property sales by 14%.

Outlook. We believe WCT is poised for a brighter earnings outlook on the impending roll-out of various public infrastructure projects such as:

(i) Penang International Airport expansion project, (ii) Pan Borneo Sabah, (iii) Subang Airport Regeneration plan (RM3.7b), and (iv) various government hospitals. Furthermore, the de-gearing exercise should strengthen its balance sheet, enabling growth in its property development segment through delivery of value-enhancing projects.

As at Sep 2024, its outstanding order book stood at RM2.93b from RM3.15b three months ago, while its tender book stands at > RM13b currently. Also helping is the more benign cost environment.

Forecasts. Maintained.

Valuations. We maintain our SoP-driven TP of RM1.43 (see Page 3) with unchanged: (i) 12x construction FY25 PER, which is at a discount to 22x we ascribed to large contractors given WCT's much smaller size, (ii) a 75% discount to its property RNAV, which is at the steeper end of our property company valuation to reflect the low realisability of WCT's GDV, and, (iii) RM2.44b REIT listing. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (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, (ii) the recovery of its construction profits with the completion of low-margin legacy projects, and (iii) a potential re-rating on a lower risk premium as it de-gears its balance sheet via land disposals as well as the listing of its investment properties via a REIT. OUTPERFORM maintained.

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

Source: Kenanga Research - 27 Nov 2024