Cautious outlook for WCT Holdings, lacks catalysts

WCT and Bina Puri are among the more active contractors in Sabah over the past few years

KUALA LUMPUR: CIMB Equities Research is retaining its Hold call for property-construction company WCT Holdings Bhd  due to the lack of catalysts.

The research house said on Friday WCT’s 1H17 core net profit was broadly in line, at 55% to 58% of its and consensus full-year forecasts. 

“We expect weaker quarters ahead due to softer property margins,” it said.

CIMB Research said its FY17-19 EPS forecasts were intact. Its realised net asset value (RNAV) based target price (still pegged to 30% discount) was reduced by 6% from RM2.10 to RM1.97 as it updated balance sheet items and impute more conservative values for its still-undeveloped land in Rawang. 

“We continue to be cautious about WCT’s earnings outlook in 2H17F. An upside risk is stronger job flows, while downside risks are deteriorating property earnings, further delays in the planned REIT and its outstanding jobs in Qatar,” it said.

“The 1H17 core net profit made up 55%-58% of our and Bloomberg consensus FY17F forecasts. We deem the results broadly in line as we expect weaker quarters ahead. 

“Property development was the weakest earnings contributor 1H17 and faces further downside risks in 2H17 from its sustained aggressive repricing strategy,” it said. 

CIMB Research said despite lower revenue on-year in 1H17, construction division chalked up a strong 58% on-year surge in EBIT, thanks to higher-margin domestic contracts. 

WCT’s construction segment turnover fell 29% on-year in 1H17 to RM690.1m but this is not a major concern to us as the decline was due to completion of a major building contract in 1H17. 

However, construction EBIT surged 58% in 1H17, likely due to final certification of works for completed projects and higher-margin new contracts. 

“The 5% construction EBIT margin achieved in 1H17 may have further upside but this could be capped by likely delays/slow progress of overseas contracts, particularly in Qatar, in our view,” it said.

CIMB Research also said WCT’s FY17F RM500mil property sales target relies mainly on its unsold property inventory of RM1bil as at end-2016, which it estimated to have declined to RM600mil to RM700mil as at end-2Q17. 

Inventory could boost sales but margins would be crimped due to aggressive rebates and repricing (evident in property EBIT margin dropping to 13% in 1H17 from 23% in 1H16). 

In 1H17, property EBIT slumped 26% on-year to RM26mil. We believe there is further downside risk to property earnings in 2H17F. 

 “We think potential upside to WCT’s earnings in 2H17F would solely come from its construction division’s domestic tender book, as prospects for its Lusail contract in Qatar are dampened by economic sanctions against Qatar. 

“During the results briefing today, we expect more details on the planned REIT strategy, which we think may be delayed to 1H18F, and more updates on its ongoing de-gearing efforts. On the domestic front, we expect WCT’s new tender book to include LRT 3 and East Coast Rail Link (ECRL),” said CIMB Research.