WCT sees 3Q construction bleeds

WCT Holdings Bhd (Nov 22, RM1.91)

Maintain buy call with a target price (TP) of RM2.14: WCT Holdings Bhd reported its third quarter of financial year 2016 (3QFY16) results with a revenue of RM414 million (+11% year-on-year, -29% quarter-on-quarter) and core earnings of RM20 million (+181% y-o-y, -8% q-o-q). Cumulative nine months FY16 (9MFY16) core earnings amounted to RM74 million, increasing +161% y-o-y amid a low base last year.

While 9MFY16 revenue was in line at 75% of our full-year forecast, core earnings disappointed at only 61% (consensus: 56%). The disappointment resulted from the construction division which suffered losses in 3Q (earnings before interest and taxes: -RM3 million). This is rather surprising as second-half FY16 was expected to witness a margin recovery, fuelled by the contribution of its newer jobs that were secured last year. No dividends were declared.

In WCT, job wins have been strong. WCT has managed to secure RM1.4 billion worth of jobs year to date (FY15: RM3 billion), with the latest being the mass rapid transit Line 2 from Bandar Malaysia South to Kampung Muhibbah (RM896 million). With this, we estimate its order book to stand at RM4.4 billion, translating to a healthy cover of 3.8 times on FY15 construction revenue.

Earlier this month, WCT saw a significant change in its major shareholders with founders Tiang Kim Hwa and Wong Sewe Wing (via WCT Capital Bhd) exiting the company by selling their 19.7% stake to property mogul Tan Sri Desmond Lim (TS Lim) at RM2.50 a share.

We reckon that the emergence of TS Lim in WCT could feed it with building related jobs from the former’s property companies (for example Malton Bhd). Also, given the common shareholding between WCT and Pavilion Real Estate Investment Trust, we cannot discount the possibility of the former’s malls eventually being injected into the latter.

WCT’s net gearing is high at 88% while its earnings delivery lacks consistency from quarter to quarter. We cut FY16 to FY18 earnings by 17%, 12% and 8% to reflect a less than promising recovery in its construction margins as earlier envisioned.

While the results were uninspiring, we reckon the emergence of TS Lim at a 30% premium to the last share price close could offer a buffer on the downside. Our “buy” rating is under review pending a briefing (yesterday) where we shall seek more clarity on its margin outlook and more importantly, the strategic direction going forward as brought by its new major shareholder.

Despite the earnings cut, our sum-of-parts-based TP is relatively unchanged at RM2.14 (from RM2.12) as we roll over from mid-calendar year 2017 to FY17. This implies FY16 to FY17 price-earnings ratio of 26.8 times and 18.4 times respectively. — Hong Leong Investment Bank Research, Nov 22

This article first appeared in The Edge Financial Daily, on Nov 23, 2016. Subscribe to The Edge Financial Daily here.