WCT Holdings Bhd (Oct 5, 88 sen)
Maintain hold with an unchanged target price of 89 sen: We organised a meeting for 13 buyside fund managers and analysts with WCT Holdings Bhd to get up to speed on WCT’s strategies in the second half of 2018 (2H18F [forecast]) and 2019F. Key topics were: i) implications of the recent RM1.8 billion Pavilion Damansara Heights (PDH) building job; ii) guidance on the pending outcome of the light rail transit Line 3 (LRT3) and mass rapid transit Line 2 (MRT2) cost rationalisation; iii) earnings drivers in 2H18F; iv) contract risks in 2019; v) revised plans for a real estate investment trust (REIT); and vi) job and property sales targets.
The pending outcome of LRT3 cost rationalisation would affect WCT’s overall job scope value and profits, for example, cancelling and/or redesigning stations. One of the four stations in WCT’s RM1.5 billion package has been scrapped (about RM100 million to RM150 million); and another is being scaled down. It said project gross margins of 8% to 10% can be preserved given reallocation of logistics and machineries over the four-year project extension but profit per annum will be reduced. WCT’s three LRT3 packages form 20% of its RM7 billion outstanding order book.
The cost of the MRT2 could be reduced by 20% to 25% or up to RM8 billion, based on our industry checks. WCT’s RM971 million MRT2 package (15% completed as at June 2018) makes up 13% of its outstanding order book. Details of how the MRT2 will be scaled down have yet to be announced but we believe it could mirror the outcome of the LRT3. We think it could have a negative impact on WCT’s scope (near Bandar Malaysia site).
In 2019, WCT will focus more on new tenders for building jobs as it targets RM1 billion to RM1.5 billion new wins (Pan Borneo Highway Sabah [though could be delayed]), PDH Phase 2, Tun Razak Exchange high-rise) which is 30% to 50% lower than its year-to-date win of RM2.3 billion. Also, WCT aims to revive its REIT plans in mid-2019, to list four property investment assets (RM2.5 billion total asset value) which would de-consolidate RM600 million worth of debts. We are not too excited about the revival of the REIT plans for now, given execution issues and delays in the past.
LRT 3 and MRT 2 cost reduction, and challenging inventory-driven property sales could pose downside risks to our forecasts. About RM20 million to RM30 million land sale gains should support overall earnings for 2H18F. WCT trades at -one standard deviation to its 10-year mean price-earnings ratio of 15 times but lacks catalysts. Our TP is based on a 60% discount to revalued net asset valuation with upside risks from the REIT angle and job wins. Downside risk is deteriorating property sales. — CGSCIMB Research, Oct 4
This article first appeared in The Edge Financial Daily, on Oct 8, 2018.