We attended WCT Analysts’ Briefing recently and came back feeling NEUTRAL to POSITIVE mainly because the group is looking to implement REITs worth RM2.0b worth of assets in 2015. Although it is still at the early stage, we like the fact that through listing of REITs, (i) the group can unlock its property investment assets value, and (ii) the group’s balance sheet and cash flows will improve significantly, hence, place it in a better position to finance their on-going and upcoming property development (e.g. OUG) and investment projects (Paradigm Mall JB and OUG). However, we are lowering our FY15E forecasts by 2.8% after trimming down FY15E property sales to RM700m from RM1.0b to reflect the slowdown in property market. Nonetheless, despite our concerns on the group’s outlook, we maintain our MARKET PERFORM rating and SoP-based Target Price of RM2.02 as WCT might surprise us with significant new contract flows in the near-to-medium term given its strong tenderbook of about RM4.1b.

To unlock REITs next year. The management is looking to unlock its property investment assets (BBT Mall, Paradigm Kelana Jaya, and KLIA2 Gateway) via REITs exercise. It targets to achieve at least RM2.0b worth of REITs asset size in which the assets include BBT Shopping Mall, Paradigm Mall, and Gateway Mall. Timing-wise, they target to conclude this exercise in the next 12 months from now. Our property analyst thinks that the timing could be dicey should there be

interest rate hikes which may affect valuations or investors’ appetite for MREITs. Additionally, MREITs have lost some lustre in the last 18 months as: (i) acquisitions have become tough due to the low cap rate environments, and (ii) MREITs are facing cost pressures from higher utilities costs, assessment rates while rental reversion cycles appeared to have lost momentum. The retail space will be challenging as retail demand may soften next year due to higher cost pressures (e.g. GST). Nonetheless, this move is crucial for WCT as once the REITs is being listed, it will improve the group’s balance sheet and cashflows, hence, strengthen their ability to finance other future projects (e.g. OUG will require a lot of upfront infrastructure costs) and investment property projects (Paradigm Mall JB and OUG).

Property margins to stabilize in upcoming quarters. Recall, WCT delivered lower-than-expected property margins in 9M14 (-4% ppts YTD) due to lower margins in Iskandar project, i.e. 1Medini, as the project was one of the earliest launch in Iskandar, hence lower selling price. Therefore, management expects the margins to normalize in upcoming quarters (20% from 9MFY14’s 17%) as property prices have been stable since then. We have already assumed 20% EBIT margins for this division in FY15, which is still conservative vis-à-vis historical average 3-year EBIT margin of 22%. We assume lower than historical numbers after taking into account that the projects that might be affected by GST (i.e. projects that have been launched before GST implementation date was announced and whose construction progress will cross path with the GST implementation in Apr-15).

Management expects pre-GST demand rally to boost property sales next year. While WCT is wary on property market outlook, the management expects some pre-GST demand that will help boost its property sales next year. While there is no property sales target mentioned yet for 2015, the management is targeting at least better than this year’s sales. So far, YTD, WCT has fetched new sales of RM497m vs its full-year target of RM617m. After discussions with our property analysts, we are taking a slightly more conservative view because she believes that the overall market will be challenging due to tighter lending environments, which may dampen any pre-GST demand rally. Additionally, industry players postulate that demand for properties may be soft for the next 6 months after GST.

Source: Kenanga