Post-2Q19 results briefing, we remain cautious on the outlook for WCT. While the construction division is backed by a strong order book, the outlook for its property division stays challenging. The long-waited target listing of REIT is further delayed to mid-2020. No change to our target price of RM0.915 and maintain Sell on the stock due to lack of major rerating catalyst.

Construction Remains a Core Earnings Contributor

The management explained that the exceptional construction operating margin of 11.1% was due to upward revision in margin for some completed infrastructure-related projects. As such, we expect construction margin to normalise going forward.

YTD, WCT has secured RM119mn of new job, which is the sub-package works for Pavilion Bukit Jalil Mall project. Meanwhile, WCT targets to finalise the terms and conditions for the construction contract for the Pavilion Damansara Heights Development – Phase 2, with an estimated value of RM1.0bn, by end- 2019.

As of end-June 2019, it has an outstanding order book of RM5.8bn, which could provide earnings visibility for the next 3 years.

Its tender book has decreased from about RM5.3bn a quarter ago about RM4.5bn (including Pavilion Damansara Heights Development – Phase 2) currently. For the immediate terms, it is eyeing building works.

Separately, WCT has prequalified for East Coast Rail Link construction project. Tender is expected to be called only end-2019 or early-2020.

Outlook for Property Development Remains Challenging

Boosted by the ongoing house ownership campaign, WCT recorded a much stronger property sales of RM43mn in 2Q19, versus RM14mn in the immediate preceding quarter. We expect the sales momentum to be sustained in 3Q19.

Despite the short-term lift from the house ownership campaign, we remains cautious on the outlook for its property division. YoY, the 1H property sales declined from RM83mn to RM57mn. Unbilled sales, mainly derived from Waltz Residences at Taman OUG, dropped from RM116mn to RM108mn, due to lack of major launch in 2019.

In June 2019, WCT has launched Aronia Apartments, an affording housing project in Klang with an estimated GDV of RM80mn. Meanwhile, the launch of Paradigm Residences in Johor Bahru, with an estimated GDV of RM160mn has been delayed further to 4Q19.

Target listing of REIT further postponed to mid-2020

The target listing of the proposed WCT REIT has been further postponed to mid-2020, with New World Hotel being excluded from the exercise. The proposed establishment of REIT now comprises Paradigm Mall PJ, AEON Mall Bukit Tinggi and Premiere Hotel in Klang with an estimated total asset value of RM1.2bn.

Potential Issuance of Perpetual Bond

With elevated net gearing of 0.99x and about RM1.2bn short-term borrowings, which due within the next 12 months, WCT is working on issuance of up to RM1bn of Syariah-compliant perpetual bond as part of the degearing exercise. This is to replace the RM800mn MTN which partially due next year.

Forecast

Maintain FY19 to FY21 earnings forecasts.

Valuation

No change to our target price of RM0.915, based on unchanged 0.4x CY20 P/B ratio. Maintain SELL.

Source: TA Research - 29 Aug 2019