News

• Proposes rights issue… WCT proposed a renounceable rights issue of up to 143m shares on a basis of 1 rights share for every 10 existing shares.

• …and free warrants. It also proposed a bonus issue of up to 315m warrants on the basis of 1 free warrant for every 5 existing shares held after the completion of the rights issue.

• Scheduled timeline. Both the proposals are expected to be concluded by 3Q15.

Comments

• Implied discount. Based on the indicative price of RM1 for the rights, this implies a discount of 37.5% to yesterday’s share price close of RM1.60.

• Share base impact. WCT’s share base currently stands at 1,076m. Under the minimum case scenario where dilutive securities are not exercised and treasure shares not sold, its share base will increase to 1184m (+8%). On the flipside under the maximum case scenario, WCT’s share base will jump to 1891m (+73%).

• Utilisation of proceeds. Based on the indicative price of RM1, the rights issue will raise RM143m under the maximum case scenario which will mainly be used for working capital purposes.

• Impact on net gearing. We estimate that the rights issue will reduce WCT’s net gearing from the current 66% to 56%.

Risks

• EPS dilution resulting from the rights issue.
• Stiff competition and uncertain implementation timing for its domestic construction tenders and weak property sales.

Forecasts

• As the proceeds from the rights issue will mainly be used for working capital rather than to pare down debt or make earnings accretive acquisitions, we see no reason to alter our forecasts.
• Assuming the proposals are completed by end 3Q15, our EPS estimates for FY15-16 would be diluted by 2% and 8% under the minimum case scenario and by 15% and 42% under the maximum case scenario.

Rating

SELL TP: RM1.40 ex rights

• We are not positive on the rights issue as the proceeds will not be used for earnings accretive purposes, resulting to EPS dilution. This is especially so given the sizable amount of outstanding warrants (i.e. 34% of share base under the maximum case scenario).
• Orderbook replenishment was below its burn rate in 3 out of the past 4 years while property sales have been weak.

Valuation

• We have adjusted our SOP based TP from RM1.57 to RM1.40 after accounting for the rights issue.
• Share price close of RM1.60 translates to RM1.55 on an ex rights basis. This implies 9% downside to our ex rights TP of RM1.40.

Source: Hong Leong Investment Bank Research - 17 Mar 2015