WCT announced that it has entered into a conditional lease purchase agreement with Medini Land, a subsidiary of Iskandar Investment, for the acquisition of a lease of land measuring 18.1 acres in Medini North, Johor for a total consideration of RM99.5m.

The salient details. Media reports said the leasing agreement is for tenure of 99 years. Based on the purchase price, the transaction values the land at RM126 per sq ft. Assuming a plot ratio of 3.5x, which translates into a gross floor area of 2.7m sq ft, the land works out to cost approximately RM36 per sq ft, which we deem reasonable.

Likely to be a mixed development. According to WCT's management, the land will be used for a proposed mixed commercial development with an estimated gross development value (GDV) of RM1.5bn. This will comprise offices, retail spaces and apartments, with a development period of over five years.

Enlarging its property footprint. With this latest proposal, WCT has announced the acquisition of more than RM730m worth of land this year alone, with its existing landbank targeted to hit 1,060 acres following the proposed RM450m acquisition of 58 acres along Jalan Awan Cina in OUG, as well as the recently announced acquisition of 12 acres along Jalan Skudai, Johor Bahru for RM180m. The latest announcement would also help to enlarge its footprint in Iskandar Malaysia, where the group would have an outstanding landbank of 46 acres once the acquisition is wrapped up.

Funding not an issue. As of 2QFY12, the company had a cash balance of RM893m and total borrowings of RM1.58bn, implying a net gearing of 0.44x. Having proposed to issue medium term notes (MTNs) of up to RM1.6bn earlier in 3Q this year, we believe funding would not be an issue. Assuming that the MTNs are fully utilised, WCT's net gearing will go up to 1.47x. While this may translate into higher financing costs, which we have yet to factor this into our model pending completion of the land acquisitions, we see long-term positives in potential earnings as WCT expands its property development business.

BUY. Overall, we are positive on the latest proposed acquisition as WCT continues to shore up its landbank to further diversify from its core construction business. Management has reiterated its target to grow its property development and management division to eventually contribute 55% of the group's consolidated EBIT by 2016 from 36% currently. Meanwhile, we expect more positive news to flow over the next six months as Malaysia Airports recently reaffirmed its target for KLIA2 to commence operation in May 2013. Hence, we maintain BUY on WCT, at an unchanged FV of RM3.36, based on a 12x FY13 PE.

Source: OSK