Investment Highlights

• We maintain HOLD on WCT Holdings (WCT) with a  lower fair value (FV) of RM0.42/share (vs RM0.46/share previously) based on 9x FY23F PE, in line with our benchmark for small-cap construction stocks. There is  no FV adjustments for ESG based on our 3-star ESG  rating. 

• We deem WCT’s 1QFY23 core net loss (CNL) of  RM6mil as below expectations compared to our FY23F  net profit of RM73mil and consensus’ RM76mil. The  deviation is due to slower-than-expected progress  billing of its construction projects. As such, we reduce  FY23F-24F earnings by 9%.

• WCT’s CNL narrowed 75% YoY to RM6mil in 1QFY23  as higher EBIT contribution from the property  investment segment (+93% YoY) was more than offset  by lower construction EBIT (-39% YoY). 

• The property development segment swung into the  black with an EBIT of RM6mil in 1QFY23 vs. a LBIT of  RM1mil in 1QFY22. Recall that in 1QFY22, the  division’s results included a RM56mil one-off gain  from sale of the Sungai Buaya land. 

• On a sequential basis, WCT swung into the red in  1QFY23 as profits from the construction and property  investment segment dropped. 

• After adjusting for the pandemic and inflationary  impact on construction projects (RM48mil) in 4QFY22,  construction EBIT fell 52% QoQ to RM9mil in 1QFY23  from RM19mil in 4QFY22 due to weaker margins. 

• After adjusting for rebates granted to tenants of  RM7mil and net fair value gains of RM72mil in 4QFY22,  EBIT from the property investment declined by 27%  QoQ to RM33mil in 1QFY23.  

• As there were no Bursa announcements, we believe that WCT had not secured substantial jobs in  1QFY23. Hence, we estimate that the group’s order book declined 6% QoQ to RM3.3bil as at  end-Mar 2023. This translates to 1.4x FY23F construction revenue. 

• In spite of this, we are maintaining a FY23F replenishment assumption of RM3bil, with potential job wins  including Subang Airport Regeneration Plan (SARP). Recall in 2021, the cost for SARP was RM1.3bil. 

• Other targeted projects are CMC301 of MRT3, flood mitigation projects, ECRL, Pan Borneo Sabah,  Coastal Highway Sarawak, and elevated structures in Kuching Urban Transportation System. WCT is  also looking to expand overseas, notably Nusantara in Indonesia and Middle East. 

• As for the property investment segment, we are positive on the recovery of footfalls and occupancies in  the group’s shopping malls and hotels. 

• WCT’s challenges include (i) weaker-than-expected recovery of job flows; (ii) eroding margins from  higher-than-expected building material costs and labour shortages; and (iii) shelving of mega projects. 

• WCT is currently trading at a fair FY23F PE of 9x, at parity to our benchmark for small-cap construction  stocks.

Source: AmInvest Research - 26 May 2023