Review

• Excluding exceptional losses of RM34.2mn, WCT’s FY16 core profit of RM102.6mn came in below expectations, accounting for 91.4% and 87.9% of ours and consensus’ full-year forecast respectively. The variance was due mainly to lower-than-expected contribution from the property division and JVs, as well as higher-than-expected taxation.

• No dividend was declared for FY16, versus 3sen/share plus 1:100 share dividend distributed for FY15.

• YoY, FY16 core profit surged 48.2% to RM102.6mn as revenue jumped 15.5% to RM1,933.6mn. The improved bottom line was mainly due to better operating profits from the construction (+28.8%) and property development (+20.5%) divisions, as well as lower finance costs (-19.3%).

• QoQ, 4Q16 core profit surged 42.6% as revenue increased 9.4% to RM453.2mn and the construction division turned around from lossmaking in 3Q16. However, the property division recorded lower operating profit (-33.5%) as the quarterly property development revenue plunged 25.3% compared with a quarter ago.

Disposal of “The Ascent” together with lease agreement

• Subsequent to the previous company announcement dated 11 November 2016, the group announced that its 70% JV, Jelas Puri Sdn Bhd (JPSB) has entered into a conditional agreement to dispose of the office tower known as “The Ascent” and 4-levels elevated car parks to EPF, for a consideration of RM347mn. WCT has recognised share of losses of RM26.2mn arising from the revaluation of the properties.

• Concurrently, WCT has entered into a lease agreement with EPF for the proposed lease of “The Ascent” while JPSB has entered into a lease agreement with EPF for the proposed lease of car parks.

• In addition to that, a Right of First Offer (ROFO) & Put Option Agreement was entered into between WCT and EPF.

• We are neutral on the proposed transactions. While the proposed disposal would incur minor loss to the group, it allows the group to reduce its gearing and strengthening its balance sheet. Meanwhile, the lease agreements allow the group to retain operational control over the properties for a period of 15 years and generate rental and car park related incomes. And in the event EPF decides to sell the properties to a third party, WCT has the ROFO to acquire the properties from EPF.

• The proposed disposal is expected to be completed by the end of 2Q17.

Impact

• Minor adjustments are made following the full-year FY16 results. We trim FY17 earnings by 1.9% and tweak FY18 earnings forecasts higher by 2.5%.

Outlook

• WCT’s outstanding construction order book is estimated at RM4.0bn as of end December 2016, translating into 2.5x FY16 construction turnover. This could provide construction earnings visibility for the next 2 to 3 years.

• For its property division, the group would be more cautious in launching of new projects in FY17. It will intensify its marketing efforts and sales initiatives to improve the property sales which we think may affect its property margin.

Valuation

• Following the earnings revision, we lower the target price from RM1.54 to RM1.50, based on unchanged 14x CY17 construction earnings and 10x CY17 property earnings. Maintain SELL call on WCT.

Source: TA Research - 24 Feb 2017