KEY INVESTMENT HIGHLIGHTS

• 3QFY20 normalised earnings fell to RM3.3m (-61.7%yoy) due to the higher costs and lower work progress
• 9MFY20 normalised earnings declined by -88.4%yoy to RM8.6m as a result of lower progress billings
• Work pace and hotel operations to resume at slower pace due to stringent Covid-19 preventive measures
• Sizeable order book of about RM5.0b which translates into earnings visibility for the next three to four years
• Maintain NEUTRAL with an unchanged TP of RM0.42

Below expectation. WCT Holdings Berhad’s (WCT) 3QFY20 normalised earnings declined by -61.0%yoy to RM3.3m, mainly as a result of higher cost of sales at RM326.4m (+18.7%yoy) and higher tax expenses at RM11.8m (>100.0%yoy). Cumulatively, the group’s 9MFY20 normalised earnings plunged -88.4%yoy to RM8.6m, primarily due to the slower pace of work progress and hence lower progress billings. This was below both our and consensus expectations. Moving forward, we expect WCT’s construction and business activities to recover on a slower pace in view of the resurgence of Covid-19 pandemic in 4QFY20.

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 includes the award of RM1.2b superstructure work for Pavilion Damansara Heights (Parcel 2). The segment posted lower operating profit of RM41.0m (-57.3%yoy), resulting from i) slower work progress for some construction projects and, ii) the downward revision in the expected margin of certain projects.

Property development to be the bright spot. This division outperformed other division as its operating profit increased by +25.5%yoy to RM64.0m in 9MFY20. We note that this was primarily attributable to the higher sales of the Waltz Residences during the period under review. We do not discount of the potentially higher property sales on Home-Ownership Campaign announced by the Malaysian Government.

Earnings estimates. We are revising our FY20 earnings forecast to RM15.1m on lower revenue and lower margin assumption in view of the extended lockdowns and resurgence of the Covid-19 pandemic. That being said, we are keeping our FY21 and FY22 earnings forecasts unchanged at this juncture.

Target price. We are maintaining our TP to RM0.42. This is based on 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.

Maintain neutral. In the near term, we expect that the group’s revenue and earnings prospects to remain lacklustre in anticipation of the slower resumption of construction and business activities and limited workforce capacity at work sites in view of the stringent Covid-19 standard operating procedure. This is might dampen the earnings prospects in the short-tomedium term as construction progress billings would be affected on slower work progress. On the property segment, we opine that sales to remain subdued given the weak consumer sentiments and avoid big-ticket items in the foreseeable term. In addition, the recent resurgence in Covid-19 cases might cause continual downward pressure on its property investment and management segment as the group’s retail mall and hotel traffics continue to be hampered by the extended movement restrictions. Nonetheless, on a longer term horizon, the group’s prospect is well-supported by its strong outstanding order book of about RM5.0b which will provide earnings visibility over the next three to four years. All in, we maintain our NEUTRAL recommendation on WCT.

Source: MIDF Research - 26 Nov 2020