KEY INVESTMENT HIGHLIGHTS

• 2QFY20 normalised earnings fell to RM7.4m (-67.7%yoy) due to the disruption brought about by the MCO

• 1HFY20 normalised earnings declined by -91.6%yoy to RM5.2m as a result of lower progress billings

• Work pace and hotel operations to resume at slower pace due to stringent COVID-19 preventive measures

• Healthy order book of about RM5.0b which translates into earnings visibility for the next three to four years

• Maintain NEUTRAL with a revised target price at RM0.42

Below expectation. In 2QFY20, WCT Holdings Berhad (WCT) registered revenue of RM375.0, (-16.7%yoy). This led to lower normalised earnings of RM7.4m (-67.7%yoy). Cumulatively, the group’s 1HFY20 normalised earnings plunged -91.6%yoy to RM5.2m, primarily due to the disruption brought on by the movement control order (MCO) on construction and business activities which led to lower progress claims. This was below both our and consensus expectations. Moving forward, we expect WCT’s construction activities to gradually recover in 2HFY20 albeit at a slower pace and subdued property sales.

Engineering and construction segment remains tepid. The E&C segment represented for 71% of WCT’s total revenue, underpinned by its current order book which stood at over RM5.0b. This included the latest job award, which is the RM1.2b superstructure for Pavilion Damansara Heights (Parcel 2). This segment posted lower revenue of RM507m (-30.2%yoy) in 1QHY20 from RM726m in 1HFY19. The decline was premised on i) slower work progress for some construction projects and, ii) the downward revision in the expected margin of certain projects.

Property development to be resilient. This division is outperforming other division as its revenue increased to RM144.0m (+5.1%yoy) in 1HFY20 as compared to RM137.0m in 1HFY19. We note that this was primarily attributable to the higher sales of the Waltz Residences during the period under review. Thus, the operating profit of this division has improved as well to RM49m (+8.9%yoy) in 1HFY20 from RM45m in 1HFY19. We do not discount of the potentially higher property sales on Home-Ownership Campaign announced by the Malaysian Government.

Earnings estimates. We are making some housekeeping changes to our earnings estimates to also take into account the impact of the MCO on the group’s businesses. We are revising our FY20 and FY21 earnings forecast to RM31.1m and RM55.9m respectively as well as introducing our new set of FY22 forecasts.

Target price.We are revising our TP to RM0.42 (previously RM0.52).

This is achieved through pegging a forward PER of 10.4x to the group’s FY21 EPS of 4.0sen. Note that the PER is the group’s two year historical average.

Source: MIDF Research - 27 Aug 2020