WCT conducted its 4Q16 results briefing last Friday. The briefing focused on the construction division, property development division, and degearing exercises to be implemented by the group within the next 1 to 2 years . Key takeaways include:

Construction Division to Take the Lead

Amid the soft property market condition, the construction division is expected to be the group’s core income generator in the foreseeable future. Its construction division is backed by sizeable outstanding order book of RM5.1b (see Exhibit 1), which could last for another 3 to 4 years.

The management was bullish on the outlook for the construction division as construction progress for some of the major projects are gaining momentum. Besides, the management expected the construction margin to expand as the current outstanding order book is dominated by infrastructure works which typically yield higher margin than building jobs. Nevertheless, we are cautiously optimistic on the bullish view as potential resources constraint and the challenging nature of the MRT jobs could cause margin squeeze and negatively impact the bottom line. With several building jobs coming to tailend, WCT is ready to take on some new building jobs.

Outlook for property market remains challenging

Its property division recorded RM281mn of sales in FY16 versus management’s guidance of RM600mn and our assumptions of RM500mn. While there was still demand for properties when buyers have turned more cautious, another challenge in property sales came from the difficulty in securing property financing by the prospect buyers.

For FY17, in view of the cautious sentiment in the property market, WCT has no definite plan in launching new property projects yet. It will be focusing on selling existing units in hand, instead of launching new development project as it requires working capital to kick off a development project. It has set a property sales target of RM500m for FY17. To boost property sales, the group will adopt repricing strategy to bridge the gap in securing financing. In our opinion, besides boosting sales, these moves would help to bring down the group’s gearing level. However, property margins for these sales are expected to be eroded by the repricing strategy.

Several Degearing Initiatives

Besides the disposal of the office tower “The Ascent” and the proposed private placement which have announced by the group, it is looking at various ways to reduce the gearing level to strengthen the balance sheet. These include monetization of assets such as lands, shopping malls (Bukit Tinggi Shopping Mall and Paradigm PJ Shopping Mall) that have matured and generating good cash flow, and put in more concerted efforts in selling existing unsold property units. On the disposal of shopping malls, the group is in discussion with a REIT player and an investment fund. The group did not declare any dividends in FY16 as it is conserving cash to reduce the group’s gearing level .

Opening of JB Paradigm Mall to be delayed to 2H17

Down South, the group targets to open Paradigm Shopping Mall in JB in late 2H17, delayed from 2Q17 guided previously. Nonetheless, We think the shopping mall could leverage on the brand name of Pavilion, whereby Tan Sri Lim is the Executive Chairman of Pavilion REIT, to secure quality tenants for its mall.

Forecast

Despite the FY16 property sales came in below our forecast, we maintain our earnings forecasts as the group is focusing on the sales of existing property units whereby revenue and profit would be recognized immediately when these units are sold, versus new developments whereby the revenue and profit will be recognized by progressively according to the milestones of the construction progress.

Valuation

Maintain SELL call on WCT with an unchanged target price of RM1.50, based on unchanged 14x CY17 construction earnings and 10x CY17 property earnings.

Source: TA Research - 27 Feb 2017