We maintain FY13-14 forecasts and fair value of MYR2.30 following the release of 1QFY13 results that came in within expectations.  While we expect better appetite for construction stocks post the 13th general election, we believe upside of WCT shares is exhausted after the recent run-up in share price.  Downgrade to Sell from Neutral.

-  Within expectations.  1QFY13 net profit came in broadly within expectations at 21-28% of our full-year forecast and the full-year consensus net profit.  Included in the number was MYR26.3m payable to former subcontractor Bahrain Asphalt Establishment for the Dukhan Highway project in accordance with the verdict of a contract dispute tribunal.  While some may argue that this is an exceptional or one-off item, we are more inclined to see it as an inherent risk/cost for a construction company operating in the Middle East,  Recall, just three months ago, WCT was hit by other cost items from projects in the Middle East, i.e. defect liabilities arising from the Abu Dhabi F1 Circuit and Bahrain hotel fit-out contracts (MYR26m) as well as over-estimation of variation orders from the New Doha International Airport project (MYR14m).

- Eyeing Kwasa Damansara, Media City.   During the last analysts’ briefing in Feb 2013, WCT said its tenderbook comprises, among others,  infrastructure work for  Kwasa Damansara (the 2,200-acre Rubber Research Institute land in Sg Buloh), Media City (redevelopment of Angkasapuri), a privatised hospital in Sabah as well as jobs from Petronas’ Refinery and Petrochemical Integrated Development (Rapid) project, Vale distribution centre, Tun Razak Exchange (TRX), Southern double-tracking, West Coast Expressway, Penang Traffic Allevation, Warisan Merdeka Tower, Oman and Qatar.

- Downgrade to Sell from Neutral.  With the 13th general election now out of the way, we believe investors will refocus on sector fundamentals that are reasonably attractive underpinned by a construction upcycle.    However, at the current price, we believe WCT’s valuations have run ahead of its earnings.  Fair value is MYR2.30 based on 16x FD FY14 EPS of 14.3sen, in line with our benchmark 1-year forward target PER of 10-16x for the construction sector.

Source: RHB