WCT - Construction Works Slightly Dented

WCT’s 1HFY12 net profit of RM79.5m fell below our and consensus expectations, at 43.1% and 42.8% of the estimates respectively due to a weaker-than-expected showing from its construction division. We are taking a precautionary approach by trimming our EPS forecasts by 2.4% for FY12 and 3.2% for FY13, but remain positive on the company’s long-term prospects given its sturdy outstanding orderbook of over RM2.5bn as well as potential jobs flow for the remainder of the year. Maintain BUY with a FV lowered to RM3.06 based on 12x FY13 PE.

Below expectations. WCT’s 1HFY12 revenue registered at RM738.4m (+6.8% y-o-y) due to an improved showing from its property division, which grew 54.8% y-o-y to RM166.3m, to help to offset the marginal 3.6% decline in its construction segment. EBIT however dipped 5.9% y-o-y to RM121.6m due to the sharp 280bps drop in its construction margin. Nonetheless, growth resumed at net levels with 1HFY12’s net profit 5.8% higher at RM79.5m due to lower financing costs, better performances by its associates, as well as forex gains of RM4.2m vis-à-vis RM16.3m losses in 1HFY11. On a quarterly basis, 2QFY12 numbers generally showed some decent improvement y-o-y despite a lower contribution from its construction division, thanks to higher property sales. Relative to 1QFY12, however, numbers were dragged down by a lower construction margin. This resulted in core earnings of RM39.5m (+7.1% y-o-y; -1.3% q-o-q). On a separate note, WCT declared its first interim DPS of 3.75 sen.

Potential jobs flow. Having secured RM1.1bn worth of new jobs YTD vis-à-vis our replenishment target of RM1.5bn for the year, WCT’s outstanding orderbook currently stands at an estimated RM2.5bn. We expect the group to secure more contracts by year end, with potential infrastructure jobs in Oman and UAE. Updates on other divisions will be shared in its analysts’ briefing to be held later today. 

Revising forecasts. We are taking a precautionary approach by revisiting our model to impute for slower revenue recognition as well as a lower margin assumption from its construction division taking a toll on 2QFY12 results. Consequently, our FY12 and FY13 forecasts are trimmed by 1.2%-3.1% at top-line levels while our EPS estimates are lowered by 2.4% for FY12 and 3.2% for FY13. We also introduce our FY14 numbers with core earnings of RM221.0m.

BUY. Despite the marginal tweak in earnings, we remain positive on WCT’s long-term prospects given its potential jobs flow before the turn of the year while the opening of KLIA2 scheduled in April 2013 may prove to be a re-rating catalyst. Hence, maintain BUY with our FV adjusted to RM3.06 rolling forward our valuation to FY13 based on 12x PE (from 14x previously to account for a potential shortfall in orderbook replenishment).

Source: OSK