WCT Berhad: Storm in a Teacup.

• Below expectations; maintain OUTPERFORM. WCT’s 9M10 results were below expectations as annualised core net profit made up only 82% of our full-year forecast and 90% of consensus. We had been too optimistic on the timing of recognition of existing and new jobs. That said, 4Q should be a better quarter as new jobs will start contributing, activities are picking up in the Middle East and property contribution should increase. We cut our FY10 EPS forecast by 6.3% and maintain our FY11-12 numbers given WCT’s outstanding order book of RM4.4bn.

We maintain our OUTPERFORM call and RM4.21 target price, which is pegged to an unchanged 10% discount to RNAV. The main re-rating catalyst is project wins. WCT is one of our top picks for the construction sector.

• Dented in 3Q10. 9M10 revenue sank 63.3% yoy, dragged down by the 73% yoy revenue slump in 3Q10 due to (i) the completion of projects, (iii) delay in the recognition of new jobs and (iii) slowdown in construction in the Middle East during Ramadhan. However, EBIT margin expanded 6.9% pts to 12.8%, mainly due the recognition of about RM15m tail-end profits from the Abu Dhabi F1 job. This cushioned 9M10 core net profit which ended up down 13.3%. The absence of dividends was not a surprise.

• Cutting FY10 forecast. In view of the above, we cut our FY10 forecast by 6.3% which now assumes strong contribution from new jobs, a pick-up in construction activities in the Middle East and stronger property contributions. We expect 4Q to be a better quarter. Our FY11-12 numbers are relatively unchanged, driven by the RM4.4bn outstanding order book and our assumption of RM1.5bn-2bn new contracts for the next two years.

• Laggard; outlook remains positive. The outlook for construction remains positive, both locally and overseas, and there is a strong likelihood of more contract wins in the next six months. WCT's latest project in Qatar worth RM1.4bn is by far the largest open tender project awarded to a local contractor this year. WCT’s YTD share price performance has lagged behind IJM’s and Gamuda’s. We view this as a buying opportunity.