News

• Proposes private placement. WCT announced that it will be undertaking a placement of up to 125m new shares, representing c.10% of its existing share base (ex. treasury shares).
• Utilisation of proceeds. Based on its assumed indicative issue price of RM1.70 (9.6% discount to yesterday’s close of RM1.88), the placement will raise RM212.5m. This will be utilised for repayment of borrowings (RM80m), working capital (RM130m) and placement related expenses (RM2.5m).

South Comments

• Not entirely surprising. Prior to the changes in WCT’s major shareholders last year, management guided that it was likely to embark on a placement exercise as part of its de-gearing plans.
• Little room for more debt. As of 3QFY16, WCT’s net gearing stood at 88%. Given this high level, we feel that its funding is constrained to equity sources rather than debt. The funds will be needed for working capital related to some of its newly secured sizable jobs such as the MRT2 (RM896m), Pan Borneo Highway (RM389m), several packages at RAPID and development cost for Paradigm Mall JB, Lead Residence Klang and Waltz Residence KL.
• Impact to net gearing. Based on our estimates, the placement is expected to reduce WCT’s net gearing from 88% (3QFY16) to 75% on a proforma basis.

Risks

• The key risks are its inconsistency in earnings delivery from quarter to quarter and high net gearing (88%).

Forecasts

• We leave our forecast unchanged for now pending more clarity on the timeline for the completion of the placement exercise (submission to Bursa within 3 months and completion within 6 months of approval).
• As an indication, assuming the placement is completed this year, the full year impact to FY18 EPS would be a 7% dilution. While EPS would be diluted by the 10% placement, this is partially offset by some interest savings (estimated at RM4m) following some debt repayment from the proceeds. Rating Maintain HOLD, TP: RM1.97
• Contrary to earlier expectations, management’s guidance on WCT’s new strategic direction seemed to be a status quo rather than a value creating change following the changes in its major shareholders in Nov 2016. As such, we fail to see an eventual near term re-rating with an unchanged strategic direction coupled with continued results inconsistency.

Valuation

• Our SOP based TP is lowered slightly from RM1.99 to RM1.97 as we factor dilution from the placement which is partially offset by the cash infusion from its proceeds. This implies FY17-18 P/E of 17x and 14.6x respectively.

Source: Hong Leong Investment Bank Research - 19 Jan 2017