Results Review

• Stripping off the pandemic and inflation impact on construction projects of RM197.8mn and other one-off items, WCT disappointed with a core net loss of RM40.9mn in FY23, against our net profit forecast of RM35.9mn and the consensus net profit estimates of RM57.5mn, respectively. The variance was mainly due to lower-than-expected operating margin stemming from prolongation and escalating input costs.

• YoY, FY23 revenue declined 17.9% to RM1.7bn, owing to lower revenue contribution from construction division (-21.7% YoY) and property development division (-19.8% YoY). Consequently, the group registered a core net loss of RM40.9mn compared to a core net profit of RM48.9mn last year. The weaker earnings performance was chiefly attributed to slower construction progress, alongside margin squeeze due to surging material costs and provisions for job prolongation.

• QoQ, the group’s core net loss narrowed down to RM9.7mn from RM12.5mn in preceding quarter, despite a 19.1% decline in revenue to RM401.7mn. We attribute this improvement to the implementation of better cost control measures.

• The group’s net gearing level increased from 0.7x as of end-3Q23 to 0.92x as of end-4Q23. If we treat the perpetual sukuk as borrowings, the net gearing would have increased from 1.14x as of end-3Q23 to 1.20x as of end-4Q23.

Impact

• Following the weaker-than-expected results, we revised our revenue recognition and margin assumptions for certain ongoing projects. Consequently, earnings forecasts for FY24/FY25F are reduced by 23.7%/17.7%, respectively. We also introduce our FY26F earnings projections of RM67.0mn, representing an earnings growth of 6.1%.

Outlook

• Despite the slower work progress and sluggish margin recovery, WCT is cautiously optimistic about its outlook, concentrating on project execution and cost recovery from completed projects. Meanwhile, it is looking forward to the roll out of mega projects in Malaysia in the near term, which could bolster its orderbook by securing more new jobs.

Valuation

• After factoring in the revised earnings and rolling forward our valuation base year to CY25, we adjust the target price lower from RM0.55 to RM0.54, based on unchanged target PER 12x. Downgrade the stock from Hold to Sell.

Source: TA Research - 1 Mar 2024