We recently visited WCT's next property investment project in KLIA, Gateway@KLIA2 ('the Project') and are positive with its prospects as the Project will benefit from the potentially strong traffic at the upcoming KLIA2 terminal ('the Terminal'). To recap, KLIA2 is a dedicated airline terminal for AirAsia and other Low Cost Carrier (LCC) operators. KLIA2 is designed to handle up to 45m passenger traffic per annum. In 2011, AirAsia carried about 18m passengers and based on our in-house forecast, the passenger traffic from AirAsia could reach up to 20m and 22m in 2012 and 2013 respectively. All these bode well for WCT and MAHB (OP, TP: RM6.50) as the former operate at the commercial area of the Project while the latter manages the whole Terminal. We believe that the Project's potential is still not seen by investors yet at this juncture. This could be due to the ongoing issues and debates between MAHB and AirAsia, which could put the project's viability at risk. Nonetheless, the fundamentals remain intact as AirAsia will be the main tenant to occupy KLIA2. Going forward, we see Gateway@KLIA2 to be one of the next key rerating catalysts for WCT's share price apart from others such as the company likely securing more construction projects in the near term. We are maintaining our OUTPERFORM recommendation with the unchanged Target Price of RM3.92 based on SOP valuation. We value The Gateway@KLIA2 at RM0.85 per share in our SOP calculation above.

Construction on track. As at July 2012, the construction of the Project has reached the 72% completion stage with full completion scheduled to be by 31 March 2013. There was a slight delay in the M&E works at the parking bays by 30 days. However, management said that delay is relatively minor and it will not derail the completion date.

Take-up rate expectations. SASB have appointed DTZ Nawawi Tie Leung ('DTZ') to market and manage its commercial areas including the tenders filtering process and tenants selection. Thus far, DTZ has successfully gathered 25 tenants and 15 of them are expected to sign the tenancy agreement in the near term. At the terminal, MAHB has successfully tendered 30% of its commercial plots and received an overwhelming response and interest from existing and new retailers. We expect that there will be a spill-over of the demand to Gateway@KLIA2.

Potential upside on earnings. We have factored in the contribution from Gateway@KLIA2 in our forecasts and SOP valuation for WCT. Since SASB is a jointly controlled entity, WCT will not consolidate SASB's account but equity account as contribution from associate. Based on our estimate, we expect the Project to contribute 1% to WCT's pre-tax profit in FY13 and significantly increasing by 181% thereafter until FY16. We expect the earnings growth to normalise from FY16 onwards at 4% to 5% per annum.

Risks.Nonetheless, there are two key operating risks for the Project i.e. (1) its traffic is highly dependent on AirAsia's passenger traffic and growth (2) a lag effect on rental rate growth as SASB has agreed that rental rates in Gateway@KLIA2 will be capped at 'one-notch' lower than KLIA2 rental rates at all time.

Maintain OUTPERFORM and Target Price at RM3.92 based on SOP. We are maintain our OUTPERFORM rating on WCT with the unchanged Target Price of RM3.92 based on SOP valuation.

Source: Kenanga