WCT’s 1HFY24 results met expectations. Its 1HFY24 core profit jumped five-fold to RM27.4m as margin recovery in its construction unit meant that pressure from prolongation costs has faded, while property earnings were supported by strong sales. It is poised for better earnings prospects with several projects in the pipeline. Its REIT listing is the start of a re-rating exercise; hence, we upgrade it to MP with a higher TP of RM1.17.

1HFY24 inline. At 51% of our FY24 forecast, 1HFY24 core profit of RM27.4m matched our expectation but it topped market consensus at 58% of full-year estimate. No dividend was declared during the period as expected as it normally only pays a final dividend in the 4th quarter.

YoY. Its 1HFY24 revenue inched up 2% to RM843.7m mainly driven by higher property revenue (+68%) on higher property sales (+174%) but construction revenue declined 18% due to slower progress billings.Nonetheless, its core profit surged to RM27.4m from RM5.3m in the same period last year. This was attributed to a broad-based improvement from all segments, especially the construction profit which jumped 88%, as we believe, after adjustments for work prolongation and escalation in input and labour costs previously.

QoQ. Despite a lower revenue (-19%), it reported RM31.3m core profit vs. core loss of RM3.9m last quarter which was hit by the distribution of profits to the holders of its Perpetual Sukuk. Segment-wise, construction earnings were weak due to slower progress billings as mentioned but property earnings jumped on higher property sales.

Outlook. We believe it is poised for a better FY24 on the impending roll-out of various public infrastructure projects such as: (i) MRT3 (RM45b), (ii) Penang LRT Mutiara Line (RM10b), (iii) Pan Borneo Sabah, (iv) Subang Airport Regeneration plan (RM3.7b), and (v) various government hospitals. As at Jun 2024, its outstanding order book stood at RM3.15b from RM2.95b three months ago, while its tender book stands at >RM13b currently. Also helping, is the more benign cost environment.

Forecasts. Maintained.

Valuations. With the REIT listing scheduled for 1QCY25, we expect a stronger better balance sheet to fund business activity, especially for its property arm. In view of this, we lower the discount to its property RNAV to 75% (which is still at the steeper end of our property company valuation) from 85%. As such, we upgrade our SoP-driven TP to RM1.17 (see Page 3) from RM0.95. Our 12x FY25F PER ascribed to WCT remains unchanged. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (Page 5).

Investment case. We like WCT for: (i) the improved prospects of the local construction sector with the anticipated roll-out of public projects, (ii) the recovery of its construction profits with the completion of low- margin legacy projects, and (iii) a potential re-rating on a lower risk premium as it de-gears its balance sheet via land disposals as well as the listing of its investment properties via a REIT. As such, we upgrade the stock to MARKET PERFORM from UNDERPERFORM.

Risks to our call include: (i) weak flow of construction jobs from public and private sectors, (ii) prolonged slowdown in the local property market, (iii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and (iv) rising building material cost.

Source: Kenanga Research - 28 Aug 2024