This article first appeared in The Edge Financial Daily, on October 29, 2015.

WCT Holdings Bhd
(Oct 28, RM1.38)
Maintain hold with a higher fair value of RM1.52: We maintain our “hold” call on WCT Holdings Bhd with our fair value raised a tad higher to RM1.52 per share (previously RM1.51 per share) following its latest construction award. WCT announced that it secured a letter of award from PRPC Utilities & Facilities Sdn Bhd, a unit of Petronas.

The award is for the procurement, construction and commissioning at the client’s utilities, interconnecting and offsite facilities. This is related to Petronas’ Refinery and Petrochemical Integrated Development  project.

WCT’s latest contract win (RM267 million over 31 months) is its second in a week after securing some RM755 million worth of road and infrastructure works at the Tun Razak Exchange (TRX).

The latest contract from Petronas is WCT’s second from the national oil giant, following an earlier RM342 million contract.

We believe that this reinforces WCT’s proven expertise in undertaking major earthwork and infrastructure jobs in Malaysia.

Year to date, the new contracts secured are worth about RM2.1 billion or roughly 2.1 times the total jobs it secured in 2014. Assuming pre-tax construction margins of 6%, we correspondingly raise our financial year ending Dec 31, 2015 (FY15) to FY17 forecast core net profit by 1% to 4%.

While WCT’s order book revival is positive, we remain concerned with its rising cash flow needs from aggressive property investment expansions that may further strain its cash flows amid a weaker retail environment. Excluding the proposed Overseas Union Garden mall in Kuala Lumpur, in-house construction of its property investments for 2QFY15 was already worth about RM585 million.

This is not helped by the prospect of rising Malaysian government securities yields, which in turn, make asset monetisation plans more challenging, we believe. What’s more, the amount due from the Meydan Racecourse arbitration award will likely not be immediately available, we understand.

WCT is also aiming to acquire a plot of land in TRX for RM223 million. While WCT has a good track record in developing township land via the successful Bandar Bukit Tinggi township in Klang, it is still relatively new in the high-end segment.

A higher plot ratio of about 11 times for the TRX land may require a higher break-even sales volume. As the TRX is a greenfield area, it remains to be seen whether this can be achieved. — Am Research, Oct 28