In a briefing after the 3Q results, WCT Holdings (WCT) revealed that the Group is exploring the possibility of floating the existing assets via a REIT structure. The assets identified include Paradigm Mall, BBT Mall and Gateway Mall (KLIA) with estimated combined size of RM2bn. The proceeds will be mainly used to defray current debts and as working capital for the Group‟s property projects (especially OUG mixed development which is targeted to be unveiled by 2H2015).

Unlocking value through REIT. With the projected capital commitment to increase in the next few years, WCT has plans to list its current investment assets to lighten its balance sheet. We understand that two of its assets have just revised the rental, and WCT believes that it is an opportune time to float the assets in 2015. The size of the REIT is expected to be c.RM2bn, and we understand that the proceeds will be utilized to pare down debts and used as working capital. Although positive, we would prefer WCT to wait longer for the assets to mature (none of the assets are longer than 10 years) and the demand for REITs might also be challenging in the rising interest rate environment. If WCT can pull it off, we estimate its debt might be pared down by one-third, giving the Group more headroom to allocate the capital to its new projects.

Weaker margins registered in the 3QFY14, as reported earlier was due to margin compressions from higher construction costs and lowmargin projects such as One Medini in Johor. Property sales, albeit weak in the 1H, has since improved. We understand that construction billing for the quarter was coming mostly from building jobs, which traditionally command lower margins than infrastructure jobs. Going forward, the Group expect the margins to improve closer to 8-9% PBT for construction and c.20% for property.

Maintain Outperform and our SOTP-derived TP to RM2.50. We like WCT for its strategic shift towards a more sustainable business model of growing recurring income. Also, if the proposed REIT materializes, it could unlock the value of the Group and lighten the balance sheet.

Source: PublicInvest Research - 26 Nov 2014