· We maintain our HOLD call on WCT Holdings with a higher fair value of RM1.52/share on a lower discount of 40% to its NAV (previous: 45%) as we account for a higher new order book forecast for FY15F following its latest contract win at the Tun Razak Exchange (TRX) project.

· WCT announced that it has accepted a letter of award from 1MDB Real Estate Sdn Bhd (1MDBRE) for the proposed construction and completion of infrastructure and roadway works. The infrastructure contract is worth RM755mil via three milestone payments. Construction works will commence on 21 October over 687 days.

· WCT also disclosed that it has entered into a SPA with 1MDBRE for a plot of freehold development land at TRX (Plot B12) measuring 71,986 sf (~1.7 acres) for RM223mil (~RM3,097psf). The said land’s GDV is RM1.1bil. It will have of a tower block of high-end serviced apartments with complimentary retail components. The land purchase is to be completed by 4Q17.

· After a 10% deposit payment of RM22mil, the balance 90% of the land cost will be paid in three equal tranches that is offset against the milestone payments under the infrastructure contract.

· We have raised our FY15F net profit forecast by 1% (FY16F: +7%; FY17F +10%) on estimated construction margins of 8%. The latest contract at TRX follows an earthworks job (RM70mil) that WCT secured for the same project earlier this month. It will lift WCT’s new wins secured for the FY to-date to c.RM1.8bil, which surpasses our earlier target of RM1bil. This is positive.

· As for the land, it has a maximum permissible GFA of ~775,002 based on a plot ratio of ~11x. Assuming an efficiency factor of 75%, we estimate the indicative selling price of the project to be ~RM1,892psf which we deem to be somewhat stretched as its surrounding area is still at the nascent stage of its development cycle.

· Using the same efficiency factor, we estimate the project’s breakeven cost at ~RM1,050psf. This suggests ample room for WCT to tweak down its selling price and still enjoy decent development margins of 30%. By extension, a higher plot ratio means a higher breakeven sales volume that needs to be generated. It remains to be seen whether this can be achieved.

· Similarly, the three milestone payments for the infrastructure contract may stretch WCT’s balance sheet further and put more pressure on the group to monetise its property investments. As long as MGS yields stay elevated, its prospects of fetching a decent valuation for these assets are a tad more challenging, in our view.

Source: AmeSecurities Research - 20 Oct 2015