WCT going against strong tides

WCT Bhd (Sept 23, RM2)
Downgrade to hold at RM2.06 with a revised target price of RM2.37 (from RM3.60): WCT has entered into a concession agreement with Malaysia Airports Holdings Bhd (MAHB) and Segi Astana Sdn Bhd for the privatisation of the construction, development and financing of the integrated complex at KLIA2 on a build-operate-transfer model. Recall that WCT has a 70% stake in the retail concession with MAHB holding 30%. Our analysis shows a potential share enhancement of 22 sen to WCT's sum-of-the-parts (SOTP).

We reduce our orderbook assumptions to RM1.5 billion from RM2 billion for 2012-13 and scale down our margin assumption to 7% from 8% to reflect our cautious view on the construction space. Even if the huge bulk of order book comes in by year-end, revenue and earnings would only be recognised in 2012 onwards, and construction margin is lower especially during the early stages.

We lower our 2011 net profit forecast to RM160 million from RM186 million after reducing the order book to RM200 million from RM1 billion. We also cut our forecasts for 2012 and 2013 by 16% and 23% respectively after adjusting for lower order book and margin assumptions.

WCT has guided a year-end orderbook target of RM2 billion, but has only won RM143 million worth of jobs so far. Management remains positive on hitting their year-end target. Current orderbook stands at RM3.2 billion and WCT has a tender book of RM10 billion, of which 65% is in the Middle East. Also, similar to Gamuda Bhd, WCT's ambition of venturing into property development in Vietnam could potentially be a long-term operational risk, given the unfavourable environment currently. Foreign shareholding is at 14% (highest: 28% in early-08, lowest: 10% in late-08).

Downgrade to "hold" and cut our target price to RM2.37 from RM3.60. The revised target price is derived based on SOTP, as the KLIA2 concession has now been finalised. Our previous target price was based on fully-diluted FY12F PE of 15 times and we do not think WCT would trade between historical mean and +1SD mean, as they could potentially face the risk of orderbook shortfall for 2011, coupled with the uncertain global environment.

Share price catalyst: Winning contracts from Middle East and reduce the risk of orderbook shortfall. — UOBKayHian, Sept 23