We now project WCT’s FY14 core earnings to recover by 11%  only (visà-vis  32%  earlier)  on  the  lack  of  major  contract  wins  YTD.  Also,  the postponement  of  certain  property  launches  in  FY13  may  result  in flattish FY14 property billings. As such, we cut our FY14/15 forecasts by 16%/5%  but  raise  FV  by  1%  to  MYR2.23  (from  MYR2.21)  as  we  roll forward our base year to FY15 (from FY14). Maintain NEUTRAL.

• Lack of contract wins thus far in FY14. We now project only a modest 11%  recovery  in  WCT’s  core  earnings  in  FY14  from  our  previous forecast  of  32%,  given  that  the  company  has  yet  to  secure  any  new construction  jobs  to  date.  While  we  keep  our  assumption  that  WCT should  bag  MYR1.5bn  worth  of  new  jobs  in  FY14,  it  has  become increasingly clear that  these  are  more likely to come  in during the later part  of the financial year  rather than the earlier  portion. Hence,  they are unlikely to contribute significantly in FY14.
• Also  other  factors  hampering  more  significant  earnings  recovery. There  are  also  other  factors  that  are  hampering  a  more  significant earnings  recovery  in  FY14,  namely:  i)  its  three  consecutive  lacklustre years in terms of construction orderbook replenishment in FY11-13; and ii) the postponement of several key property launches in FY13.
• Forecasts.  We cut FY14/15 net profit forecasts by 16%/5%  to factor in the less robust construction and property profits as mentioned above.
• Risks to our view. These include: i) new construction contracts secured by  WCT  in  FY14-15  falling  short  of  our  MYR1.5bn  per  annumassumption, ii) higher-than-expected input costs, and iii) weak demand for its property launches.
• Maintain  NEUTRAL.  WCT  is  not  a  good  proxy  to  the  construction sector,  as  it  has  yet  to  secure  any  work  packages  from  the  MYR73bn Klang Valley MRT project. Its property business is also facing headwinds on the back of  the  various  sector  cooling measures.  The company’s  FV is  raised  slightly  to  MYR2.23  (from  MYR2.21)  as  we  roll  forward  our valuation base year to FY15 from FY14. The FV is based on a 16x fullydiluted  FY15F  EPS  of  13.9  sen,  in  line  with  our  benchmark  1-year forward target P/Es of 10-16x for the construction sector. 

Only a Modest Recovery In FY14
Lack  of  contract  wins  thus  far  in  FY14.  We  now  project  only  a  modest  11% recovery in WCT’s  core earnings in FY14,  vis-à-vis our previous forecast of 32%,  as the  company  has  yet  to  secure  any  new  construction  jobs  to  date.  While  we  are keeping our assumption that WCT  should  bag MYR1.5bn worth of new jobs in FY14 –  vis-à-vis  management’s guidance for MYR2bn  –  it is a foregone conclusion that, if they  do  materialise,  they  are  more  likely  to  come  in  during  the  later  part  of  the financial  year  rather  than  in  the  earlier  portion.  This  means  these  new  jobs  are unlikely  to  hit  major  billing  milestones  and,  hence,  contribute  significantly  in  FY14. FY13 was a trough year  for WCT, with a  19% contraction in core earnings. This was on  the  back  of  a  kitchen-sinking  exercise  at  its  construction  division  where  certain provisions  were  made.  These  included  those  for  bad  debts  and those  arising  from downward margins revisions for ongoing contracts on rising input cost expectations. Other  factors  also  hampering  more  significant  earnings  recovery.  There  are also other factors that are hampering a more significant earnings recovery for WCT in FY14.

Firstly,  the  company  had  three  consecutive  lacklustre  years  in  terms  of construction  orderbook  replenishment.  It  only  managed  to  land  external  contracts worth  MYR670m in FY13, MYR1.1bn  in FY12  (excluding a cancelled highway job in Oman)  and  MYR187m  in  FY11  vs  its  usual  targets  of  MYR1.5-2.0bn  per  annum. Secondly,  in  FY13,  while  WCT  had  planned  to  put  into  the  market  new  property projects worth MYR1bn  in total,  in the end  it  only managed to launch  about 40% of them  due  to  design  changes  and  the  resulting  delays  in getting  the  necessary approvals to market such products.

Gateway@KLIA2  a long-term story.  As we had expected, WCT’s latest shopping mall, ie the 350,000sq ft Gateway@KLIA2, did not live up to be a re-rating catalyst to the company’s  share price on its official opening on 2 May. We project  for WCT  to account for a share of loss amounting to MYR5m from this 70%-owned entity in FY14 due to start-up costs before it is expected to breakeven in FY15.

Forecasts.  We  cut  FY14/15  net  profit  forecasts  by  16%/5%  to  factor  in  the  less robust construction and property profits as mentioned above.

Risks to our view.  These include: i) new construction contracts secured by WCT in FY14-15  falling  short  of  our  MYR1.5bn  per  annum  assumption,  ii)  higher-thanexpected input costs, and iii) weak demand for the company’s property launches.Maintain  NEUTRAL.  The  prospects  for  the  construction  sector  in  Malaysia  are strong,  underpinned  by  an  extended  upcycle  driven  by  the  MYR73bn  Klang  Valley MRT project  that should  keep players busy until 2021. However, WCT is not a good proxy to the sector as it has yet to secure any work packages from this mega project. Also,  its  property  business  is  facing  headwinds  on  the  back  o f  various  cooling measures  introduced  by  the  Government  since  end-2013.  FV  is  raised  slightly  to MYR2.23  (from MYR2.21)  as we roll forward our valuation base year to FY15 from FY14. The FV is based on a 16x fully-diluted FY15F EPS of 13.9 sen, in line with our benchmark 1-year forward target P/Es of 10-16x for the construction sector.

Company Profile
WCT is a home-grown construction company that has expanded to the Middle East. It is also engaged in property development and property investment (operating shopping malls and hotels).

Source: RHB