News  WCT proposed to undertake a right issue on the basis of 1 right for every 10 shares held. Assuming an indicative issue price of RM1.00 per rights share (discount of 35.5% to the WCT’s theoretical ex-rights price (TERP) shares of RM1.55, calculated based on the 5-day WAMP of WCT shares of RM1.61), WCT is expected to raise gross proceeds of RM109.3-143.2m. It intends to utilize the proceeds to fund its working capital.

 WCT also proposed to undertake a bonus issue of up to 315.1m new warrants in WCT (Warrant E) on the basis of 1 free Warrant E for every 5 existing WCT Shares held. Entitlement date will be determined later after the completion of the proposed rights issue.

Comments  We estimate that FY15E EPS would be diluted by 9% pursuant to the rights issuance while corresponding PER will increase to 13.3x from current 12.0x. Nevertheless, post rights issuance, despite the dilution, EPS growth is still strong at 9% in FY15-16E. This is owing to strong absolute earnings growth of 20% and 9% in FY15E and FY16E driven mainly by: (i) strong outstanding construction orderbook of RM4.0b (amongst the highest in history), and (ii) unbilled property sales of RM657m. Overall, we are NEUTRAL on the proposal because the proceeds are not for new landbanking or expansion but rather working capital. However, the funds are needed because WCT needs to finance its growing construction orderbook as well as its property investments arms.

 We also estimate post rights issuance, net gearing will be reduced by 7.4% to 0.62x.

 To summarise, in a maximum scenario, assuming full conversion of warrants C, D, E and ESOS, WCT’s share base will likely be increased to 1.89b from 1.09b currently.

Outlook  Despite the slowdown in property market, the group’s construction division is still firm backed by its strong outstanding orderbook of RM4.0b that will last the group for the next three years.

 Going forward, we believe WCT is focusing more on domestic projects such as Penang ITMP (RM20b), Petronas RAPID works (RM1.0b), TRX (RM200m), and KL118 (Warisan Merdeka) (RM2.0b). All in, the management guided that the group has submitted RM22.8b worth of tenders for local projects and with RM2.3b tenders under preparation.

Forecast  Unchanged for now but our FY15-16E EPS will likely be diluted by 9% assuming no warrants/ESOS are converted.

Rating Maintain OUTPERFORM

Valuation  We like WCT as a value play as the stock’s negatives (earnings disappointments) have been well priced-in to its share price. Note that our forecasts are already at the low side i.e. (i) 8% EBIT construction margins (vs its 5-year historical average of 11%), (ii) FY15 property sales forecast of RM600m vs management target’s RM650m, and (iii) conservative FY15 new contracts assumption of RM1.3b visà- vis actual YTD wins of RM840m.

 Maintain SoP-based TP of RM1.75 (ex-rights: RM1.59). Our TP implies fwd-PER of 13.2x FY15 EPS, in line with its 5- year historical average fwd-PER.

Risks to Our Call  Lower-than-expected new contracts flows

 Lower-than-expected construction margins

 Lower-than-expected property sales

Source: Kenanga