KEY INVESTMENT HIGHLIGHTS

• Core earnings grew 2.4x in 2QFY24 to RM31.0m; within expectations
• Slower construction progress led to -17.0%yoy lower segment PBT of RM11.2m but margins improved from 4.9% to 6.0%
• Outstanding order book at RM3.15b; achieved 23.2% of FY24 replenishment target (RM2.0b)
• Maintain NEUTRAL with an unchanged TP of RM0.97

Within expectations. WCT Holdings Bhd (WCT) recorded a core net profit of RM31.0m in 2QFY24, which grew 2.4x stronger year-on-year, on the back of stronger performances across all business segments. After removing RM19.0m of accrued cost that was reversed in 1QFY24, 1HFY24 core net profit came in at RM31.4m, which is within our expectations but ahead of consensus at 46.9% and 66.3% respectively of full-year estimates.

Engineering and construction. Revenue for the segment declined - 32.0%yoy to RM186.5m during the quarter due to slower construction progress, while pre-tax profit came in -17.0%yoy lower at RM11.2m.

There was a notable improvement in margins from 4.9% in 2QFY23 to 6.0% in 2QFY24. We expect stronger progress billings in the coming quarters as the newer projects accelerate.

Property development. Revenue rose +29.9%yoy to RM126.7m, delivering a PBT of RM16.2m, an increase of +67.0%yoy. This was attributable to the higher sales and billing of properties. WCT recorded RM314m of property sales during the quarter, as compared to RM108m in the same quarter last year. Total unbilled sales as at Jun-24 was RM749m while unsold completed inventories remained unchanged from 1QFY24 at RM118m.

Property investment and management. This segment continued to be the group's main bottom line contributor with a quarterly PBT of RM32.2m (+38.2%yoy) on the back of a stronger revenue of RM63.1m (+19.7%yoy). The stronger performance was due to higher occupancy and rental rates for its malls and higher contribution from hotels.

In need of replenishment. The group's outstanding order book stands at RM3.15b, with strong earnings visibility up to FY26. WCT has made some progress this year in terms of jobs replenishment after a two-year hiatus. It secured a RM249.7m contract to construct additional lanes for the North-South Expressway on the stretch from Yong Peng to Senai in Jun-24 and following that in Jul-24, a RM214m project for common infrastructure works and a new vehicular underpass at the Kwasa Damansara Township Development. The group is actively bidding for jobs, with a tender book of more than RM13.0b. Management has allocated more resources in order to secure new jobs, both in Malaysia and overseas. Year-to-date, it has secured RM463.7m of new jobs or 23.2% of the RM2.0b replenishment target. We believe future job wins may come from the Penang International Airport (PIA) expansion, Pan Borneo Sabah, other packages for the North-South Expressway expansion and potentially its first data centre project.

Earnings estimates. We maintain our estimates as the results were within expectations.
 

Target price. We maintain our TP at RM0.97, derived by pegging its FY25F EPS of 5.4 sen to a PER of 18x, which is +1SD above its 10-year mean.
 

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on WCT. While prospects remain bright for the construction sector for WCT to replenish more jobs, the recent rise in its share price by close to +80% since Jun-24, has stretched its valuations for a fair bit. The group had also recently announced its proposal to set up and list a REIT on the Main Market of Bursa Malaysia, which we believe will include its five retail malls. Apart from allowing WCT to unlock the value of its malls, the group will also be able to raise funds to pare down its borrowings. With total borrowings of RM3.10b as at 30th June, the group has a high net gearing of 75.6%.

Source: MIDF Research - 28 Aug 2024