News

Yesterday, WCT announced that it has entered into a Sale and Purchase Agreement with Gabungan Efektif Sdn Bhd for the acquisition of three pieces of vacant freehold land on en-bloc basis, measuring approximately 7.9 hectares (19.5 acres), for RM118.0m (RM138.7 psf).

The land is located in Klang, Selangor, which is adjacent to the group’s current Laman Greenville development and next to its existing 32.0 acres commercial development.

The proposed acquisition is expected to be completed within three months.

Comments

We were not entirely surprised as the management did mention that they had been looking to replenish their land bank to expand its property development segment (23.6% of FY14 revenue) over the mediumlong- term. We understand that the price tag of RM138.7 psf is within the market price range in Klang at RM125.0-150.0 psf.

Management mentioned that given its location next to its existing commercial development, it has the option to combine the land for potential future integrated developments with a GDV of approximately RM2.7b.

Balance-sheet-wise, assuming this acquisition is financed via 70.0% and 30.0% debt and equity, respectively, we estimate the company’s net gearing to increase to 0.72x from 0.66x. This is fairly higher than that of other developers’ net gearing range of 0.4-0.5x.

Outlook

Despite the slowdown in the property market, the group’s construction division is still firmly backed by its strong external orderbook of RM2.6b that will last the group for the next three years.

Going forward, WCT is looking to secure more domestic jobs such as Petronas RAPID works (RM1.0b), TRX (RM200m), KL118 (Warisan Merdeka) (RM2.0b) and WCE highway.

It was also reported by The Edge Weekly that WCTArabtec JV is one of the two shortlisted contractors for the RM2.0b KL118 tower project. If this is true (only two shortlisted), WCT’s likelihood of winning the job is higher as we understood the job is targeted by many big contractors. If WCT wins the job, it can easily beat our new jobs assumption of RM1.3b for this year.

Forecast

Unchanged.

Rating

Maintain OUTPERFORM

Valuation

Maintain SoP-based TP of RM1.95 (20% discount). Our TP implies fwd-PER of 13.3x 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 Research - 29 May 2015