Replenishment and sales targets guided are encouraging. With margin concerns addressed coupled with an impending recovery which will see all its segment performing stronger in FY21, we upgrade WCT to BUY with a higher TP of RM0.675 based on unchanged FY21E PBV of 0.3x. We reverse our call as (i) our earlier margin concerns were addressed, and (ii) its share price dipped post results. We also believe the strong earnings this year will overwhelm the overhanging high debt level issue.

Huge kitchen sinking done in 4QFY20 saw huge impairments worth RM175m mainly coming from its: (i) hotel assets, (ii) retail malls and (ii) existing unsold properties. During the quarter, WCT also seized the opportunity to revise contract margins lower for all their ongoing projects which explained the huge slump in 4QFY20 construction EBIT margins (to nil) as all prior earnings recognitions (which had higher margins) were subsequently reversed out. Moving forward, due to the revision, construction EBIT margins would trend lower between 5-8% vs. the 6-9% range previously guided.

We believe further impairments are unlikely to recur in FY21 given the impending recovery. If any, we believe reversals and write-backs will materialise due to the severe write-down in 4QFY20.

The guided RM2bn replenishment of orderbook will largely come from East Malaysia (i.e. Sabah) with the eventual roll-out of contracts such as: (i) Pan Borneo highway and (ii) SabahSarawak link road as the economy recovers from the pandemic. YTD, WCT has clinched RM140m worth of contracts and is currently awaiting an LOA (letter of award) for the expansion of Kota Bharu Airport worth c.RM400m.

For FY21E, management is targeting RM1.0bn worth of property sales broken into: (i) RM420m worth of completed inventories, (ii) RM170m for properties under construction, and (iii) RM410m from new launches worth RM1.7bn. Despite the high target, we maintain our RM550m sales assumption as we find the inventory clearance target of RM420m (against their total completed inventory of RM731m) slightly challenging.

Meanwhile, the two pending land sales worth RM134m are expected to crystallise in 1Q21 contributing c.RM80m to bottomline according to management vs. our initial profit estimate of RM47m. Management has also indicated that they are in the midst of negotiating further land sales (in Sungai Buaya).

Source: Rakuten Research - 19 Mar 2021