Higher costs impact WCT’s outlook despite strong orderbook


WCT Holdings Bhd’s earnings outlook remains at risk due to higher operating costs as raw material prices spiked despite its outstanding orderbook being relatively strong.

Public Investment Bank Bhd (PublicInvest Research) analyst Nurzulaikha Azali said the engineering and construction company’s levels of efficiency are also expected to remain low due to restrictions on working hours, strict standard operating procedures and worker density on the site, following the higher Covid-19 infection rates.

“Re-enforcement of Movement Control Order (MCO) 3.0+ and Enhanced MCO in some localities will hurt the contractors further as only critical maintenance, repair works and critical construction works for major public infrastructure are allowed to operate,” Nurzulaikha wrote in a research report last Friday.

However, the analyst said the RM899.8 million job recently secured by the group through its joint venture (JV) with China Communications Construction Co (M) Sdn Bhd (CCCC) to undertake expansion works for the Sapangar Bay Container Port in Kota Kinabalu, Sabah is encouraging as it signifies still-healthy workflows available.

She said the new development would be neutral on earnings expectations as the research house has already assumed this as part of its financial year 2021 (FY21) orderbook replenishment assumption of RM1 billion.

PublicInvest Research made changes to its forecasts as a result and its ‘Neutral’ call with an unchanged target price (TP) of 52 sen.

WCT and CCCC have executed a letter of acceptance with Sabah Economic Development and Investment Authority for the contract.

The JV would undertake the job as the main contractor, encompassing environment protection and enhancement, traffic management control, site investigation works, demolition and site clearance, dredging and reclamation works, seawall construction, quay deck, container yard, building works, external works and mechanical and electrical services.

The project is expected to commence in September 2021 and to be completed in 42 months by February 2025.

The contract value attributed to WCT is about RM539.9 million, based on its 60% stake.

“Assuming this project has a 7% yield, it is expected to contribute operating profits of RM3.6 million in FY21, RM10.8 million in FY22-FY24, and RM1.8 million in FY25,” Nurzulaikha added.

She said the contract represents the group’s second notable contract win in 2021, after the extension of Kota Baru Airport in Kelantan, bringing total replenishment year-to-date (YTD) to RM980 million.

PublicInvest Research estimated the group had secured RM1.1 billion YTD, which is in line with its target orderbook replenishment, though still far from management’s target of RM2 billion.

Nurzulaikha said the outstanding orderbook remains healthy at about RM5.7 billion.

Hong Leong Investment Bank Bhd (HLIB) analyst Edwin Woo said job execution should be manageable for WCT since its JV partner is vastly experienced in port construction.

“We believe funding would come from RM1 billion federal allocation from the 11th Malaysia Plan (11MP) approved last year. Hence, we reckon more contract flows from this development would depend on the timing of the 12MP rollout,” Edwin wrote in a report last Friday.

WCT had in September 2020 secured an RM92 million jetty extension works at the nearby Sapangar Bay Oil Terminal.

On the infrastructure side, Woo said near term opportunities centres primarily in Sabah, Pan-Borneo Highway Sabah and Kota Kinabalu International Airport.

HLIB has increased FY22-FY23 earnings forecasts by 1.8%/5.5% after raising its replenishment assumptions for FY21 from RM1. billion to RM1.5 billion.

The investment bank maintained a ‘Hold’ call with a higher TP of 56 sen, from 55 sen post-earnings forecasts adjustment.

The TP is derived based on a 20% discount to the sum-of-the-parts value of 70 sen and implies an FY21/FY22/FY23 price-to-earnings ratio of 66.4 times/21.7 times/10 times.

“We remain cautious on downside risk to earnings expectations, weak balance sheet and fluid politics,” he wrote.

In March, WCT bagged RM440 million contract for the extension and upgrading of the Sultan Ismail Petra Airport in Kelantan.

The group also submitted a concept paper to the government in March to propose re-concessioning Subang Airport via its subsidiary Subang Skypark Sdn Bhd, the current operator of the Subang SkyPark Terminal at the airport.

WCT shares climbed 1.96% to 52 sen last Friday, valuing the company RM736.97 million.