News

Yesterday, WCT announced that they have entered into a conditional shares sale agreement (SSA) with UEMS, to jointly develop 608.63ac of freehold land in Mukim Bandar Serendah, Ulu Selangor. UEMS will subscribe for a 50% stake in WCT’s wholly-owned JV company for a consideration of RM214.9m. The exercise is expected to be completed in 2Q16.

Comments

We are positive with WCT’s move in seeking a JV partner to take up a 50% stake in the development for its Serendah land measuring 608.63 ac, as it will further lighten up its balance sheet with gearing of 0.77x as of 9M15 which we expect to ease to 0.64x in FY16.

We believe that the acquisition price of RM214.5m for the 50% equity stake in the jointventure for the development is attractive, as the implied acquisition price of RM16.21psf is much higher compared to WCT’s average cost of RM5.82psf, and its last transacted price of RM12.0psf as of Oct-14. That said, the implied acquisition price is also within the area’s asking price range of RM15-30psf.

Outlook

Following the above-mentioned JV with UEMS, we do not rule out the possibility that WCT will embark to seek more JV partners for its upcoming projects i.e. OUG mixed development that has a potential GDV of c.RM6.0b, as part of its de-gearing exercise.

While its outstanding orderbook of RM4.3b will easily provide three years of visibility, we are concerned on the execution of these contracts, as labor issue could further bog down its construction margins.

Forecast

While there are no changes to our FY15E earnings, we raised our FY16E net profit by 1.26x to RM190.7m as we assume the potential gain from the land deal to be recognised in FY16. That said, we also tweaked our FY16E core net profit higher by 4% to RM87.4m arising from potential interest savings, as part of the proceeds would be utilised for debt repayment.

Rating

Maintain MARKET PERFORM

Valuation

No changes to our SoP-based TP of RM1.51 (@20% discount), as the negative impact to its RNAV has been cushioned by the proceeds from the land deal. Nonetheless, we are keeping our MARKET PERFORM call on WCT as our TP of RM1.51 implies Fwd. PER of 20.9x, which is rich compared to other big cap contractors.

Risks

Lower-than-expected new contract flows.

Lower-than-expected construction margins.

Lower-than-expected property sales.

Source: Kenanga Research - 2 Dec 2015