This article first appeared in The Edge Financial Daily on April 4, 2019

WCT Holdings Bhd
(April 3, 85 sen)
Maintain buy with a target price of 93 sen: We expect WCT Holdings Bhd (WCT) to stage a recovery with its financial year 2019 (FY19) earnings, driven primarily by higher progress billings at its construction division. We believe this will be enough to cushion lower contributions from its property development division. Besides better earnings prospects, we like the company for its undemanding valuations (8.3 times FY19F price-earnings [P/E], 0.39 times price-to-book-value [P/BV]), degearing initiatives via a possible spin-off of investment properties, and record RM6.3 billion outstanding order book.

Despite a decrease in the amount of construction job opportunities in 2018, WCT managed to secure RM2.3 billion worth of new orders. This comprised at RM555 million contract to construct the retail mall portion of the Tun Razak Exchange (TRX) Lifestyle Quarters and RM1.8 billion contract for Pavilion Damansara (Phase One). Towards the end of 2018, WCT secured at RM677 million contract (RM345 million effective stake) to build the shopping mall component for Permodalan Nasional Bhd’s Merdeka 118 mixed development. We include the latter as part of our FY19F (forecast) new order assumption of RM1.5 billion, which comprises private sector jobs.

We anticipate higher contributions from WCT’s construction division in FY19. This should stem from higher progress billings for projects that are midway to completion, namely mass rapid transit Line 2 (MRT2) and Pan Borneo Highway - Sarawak (PBS) that collectively form 22% of its RM6.3 billion outstanding orders on hand. In addition, we anticipate WCT to benefit from the resumption of the light rail transit Line 3 (LRT3, 22% of outstanding orders) in 2H19, albeit with the risk of a 10%-15% reduction in contract value from cost-cutting measures. The new mall jobs mentioned above, worth a combined RM2.6 billion (41% of outstanding orders) are also expected to begin contributing in FY19.

Property division is likely to remain in the black, as WCT continues to dispose of idle development land bank in Bukit Tinggi and Serendah. WCT has signed an agreement to dispose of seven acres (2.8ha) of land in Bukit Tinggi for RM55 million and could book at RM20 million-RM30 million gain in 1Q19. Meanwhile, WCT is pursuing further land sales of up to RM100 million in FY19. The company could refrain from launching new developments in FY19, which we believe is the right strategy considering the subdued market environment. In the meantime, WCT should focus on unwinding its RM950m unsold inventory, which was impaired by RM29 million in 4Q18 to reflect market prices.

Key risks include a larger-than-anticipated cut to its LRT3 contract value, failure to secure new contracts, margin erosion from more competitive tenders, and prolonged downturn in the retail and property markets. Our earnings estimates remain unchanged. — RHB Research Institute, April 3