Outlook For WCT Likely Subdued, Says CIMB Research

Outlook For WCT Likely Subdued, Says CIMB Research -  CIMB Equities Research is retaining its  Hold call for WCT Holdings with a lower target price of 84 sen compared with RM1.26 previously as it sees the outlook as likely subdued.

The research house said on Thursday it cut the target price by 33% to 84 sen as it applies a higher realised net asset value (RNAV) discount of 60% (50% previously) and trim the estimated surplus values of selected land bank. 

“Share price upside could be capped by 1) REIT uncertainties, 2) project reviews by the Pakatan Harapan government and 3) weak inventory-driven property sales,” it said.   

CIMB Research noted that WCT’s share price has plummeted 51% in the last three months, making WCT the worst performing stock in its coverage.

 “Valuations have slumped to between eight and nine times FY18-19F P/E (30% to 40% discount to the sector). Upside risk to our call is stronger-than-expected job success rate; downside risks are sustained delays in the REIT deal and weak property sales,” it said.

CIMB Research said the 1Q18 core net profit constituted 28% of its full-year forecast.

However, it deems this to be in line with expectations as the group’s property development segment’s earnings are likely to continue to be weak in subsequent quarters. 

Overall core net profit (ex-unrealised forex loss) grew 3.1% on-year, dragged by property development’s 23% contraction in EBIT, on account of aggressive discounts to reduce its inventory.   

WCT’s engineering and construction segment posted an 18% drop in 1Q18 revenue due to the timing of billings and a significant drop in internal property order book. 

However, external infrastructure jobs led to a near-doubling of EBIT in 1Q18. EBIT margin expanded from 4% in 1Q17 to 10% in 1Q18. 

“The group’s outstanding order book is now at RM5bil, which should provide good earnings visibility over the next two to three years, mitigating the soft property development earnings.

CIMB Research said that before the 14th General Election, management guided that its domestic tender pipeline was RM2.8bil. 

This included Pan Borneo Sabah, final packages for West Coast Expressway (WCE), and various undisclosed highway projects in Peninsular Malaysia. 

Post-GE14, with the likely review of jobs leading to possible delays in contract rollout, WCT’s success rate could be lower than its targeted 50%. 

“There could be risks to its target to win RM2bn worth of jobs in 2018, though we note that these are not predominantly rail.