WCT Holdings Bhd 
(March 13, RM1.62)
Upgrade to buy with a target price of RM1.84: We note that WCT’s share price has declined 8% since Feb 18 to RM1.60 last Thursday, after reaching a two-month high of RM1.74. 

We opine that the retracement was related to its weaker financial year 2014 (FY14) results which were dragged down by lower margins across all segments. 

In addition, its share price has not reacted positively to the news of the group having secured RM1.2 billion worth of projects in Qatar recently. 

We expect the share price to rebound as we opine that the group’s potential earnings growth has yet to be fully appreciated. 

The improvement in earnings is expected to be supported by stronger jobs in the pipeline and its investment properties.

The contract win for the Qatar project has surprised us as we did not account it into our list of projects this year. It has taken almost two years to secure a contract from the Middle East. 

As a first job win this year, it has already replenished 85% of our new jobs assumption of RM1 billion. 

We are looking at an operating profit margin between 6% and 8% for the project, which would deliver a profit of around RM51 million to RM68 million. 

We understand the group is targeting to secure RM1 billion each for subcontract works within Petroliam Nasional Bhd’s refinery and petrochemical integrated development project and infrastructure works within the Tun Razak Exchange in Kuala Lumpur. 

This could almost guarantee that WCT will exceed our estimated new construction jobs in FY15.

The group’s real estate investment trust (REIT) is expected to be valued at RM3 billion. We expect proceeds of RM1 billion from the REIT to be used to pare down its RM1.2 billion outstanding debt of its three assets which will be injected into the REIT.

Overall, we leave our earnings forecast unchanged at this juncture pending further clarity of the timing of the potential contracts. 

In view of the recent weakness in the share price, we upgrade our recommendation on WCT to “buy” with an unchanged target price of RM1.84. — MIDF Amanah Investment Bank Bhd, March 13

This article first appeared in The Edge Financial Daily, on March 16, 2015.