WCT’s weak property sales offset by stronger contract wins

WCT Holdings Bhd (Nov 25, RM1.53)

Maintain hold call with a higher target price (TP) of RM1.48: We have a “hold” rating for WCT based on the sum-of-the-parts (SOP) valuation methodology.

We value its construction business based on price-to-earnings ratio (PER), while its property development and property investment units are valued based on discounted cash flow (DCF) and market value respectively.

We have assumed a 40% discount to property’s SOP value.

For the third quarter ended Sept 30, 2015 (3QFY15), headline net profit of RM86 million brought cumulative nine-month (9MFY15) net profit to RM150 million.

Similar to first half (1HFY15), 3QFY15 was lifted by a RM79 million foreign exchange (forex) gain, bringing total forex gain for 9MFY15 to RM122 million.

This was due to its projects in the Gulf States (RM1 billion still outstanding largely from Lusail Development in Qatar).

Hence, 3QFY15 construction earnings before interest and tax (Ebit) more than doubled to RM91 million.

Stripping out the effects of forex, we estimate that 3QFY15 construction margin would have been circa 3%, roughly flat quarter-on-quarter. This was due to the still higher proportion of building jobs being recognised.

For 3QFY15, property Ebit was just RM25 million (versus RM8 million in 2QFY15) on the back of lower revenue of RM117 million (versus RM68 million in 1QFY15) given higher progress billings achieved.

Year-to-date (YTD) sales until September 2015 amounted to RM307 million which appears a bit stretched to meet its already lowered target of RM584 million for 2015.

In spite of the stronger construction wins, we trim our forecasted financial year ending Dec 31, 2016 (FY16F) to FY17F earnings by 1% to 2% respectively.

This largely factors in more subdued property sales which have been sluggish thus far but is offset by the stronger contract wins achieved YTD.

For FY15F, we factor in the forex gains achieved so far and some expectations for 4QFY15. We raise our TP to RM1.48 as we make adjustments to our sustainable order book assumptions in our SOP.

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This article first appeared in The Edge Financial Daily, on Nov 26, 2015. Subscribe to The Edge Financial Daily here.