Yesterday, we attended WCT’s briefing and came back feeling unexcited with its mid-term prospects, as the major highlights are de-gearing plans to address its high net gearing of 0.81x. No changes to our FY16-17E earnings. Maintain MARKET PERFORM with a lower Target Price of RM1.58 (previously, RM1.85) despite our upgrade yesterday, as we are of the view that the degearing exercise, although essential, is dilutive to shareholders due to its potential equity cash call.

Addressing its gearing issues. Management admitted that its net gearing of 0.81x is exceptionally high, which could risk a rating downgrade for its bonds as it is already above its debt covenant of 0.5x. Hence, they are looking at several funding options, i.e. (i) land deal joint-venture with UEMS, (ii) disposal of assets (office tower), (iii) potential new placement of shares of up to 5%, and (iv) the listing of its REIT followed by its construction arm in 1Q17 and 2Q17, respectively. Based on management’s de-gearing plan, they are looking to raise a total proceeds of up RM2.1b from all the exercises above, which could ultimately reduce its net gearing to 0.40x.

RM2.0b orderbook replenishment target maintained. Currently, WCT has an external outstanding orderbook of RM3.8b, with an earnings visibility of 2-3 years. In terms of job prospects, managements are maintaining target replenishment target at RM2.0b underpinned by jobs like MRT2, LRT3, Kwasa Damansara, Pan Borneo, TRX, RAPID, SUKE and DASH highway and others. However, we expect these job awards to flow in closer to 4Q16. No changes to our FY16 replenishment assumption of RM2.5b.

Keeping to sales target of RM600m. Its unbilled sales stand at RM551.0m, which provides visibility of 1-1.5 years. For 1Q16, WCT chalked up RM67.6m sales, with RM136.9m worth of bookings from its Waltz Residence (GDV: c.RM400.0m) in Paradigm Garden City (OUG) which is yet to be launched to public pending APDL approvals from the authority. Judging from the better-than-expected response for its OUG projects, managements are comfortable in maintaining their sales target of RM600.0m which is also backed by potential disposal of other property assets, i.e. office tower, which is part of its de-gearing exercise.

Maintain MARKET PERFORM with lower TP. There are no changes in earnings estimates. All-in, we are lukewarm with its degearing plans, which involves 5% placement, which is dilutive to shareholders. Overall, we are concerned about its repeated cash calls for working capital purposes, particularly when they have debt covenants to meet. To recap, WCT undertook a rights issuance to raise up to RM143.0m last year for working capital purposes. At this juncture, if parts of the de-gearing exercise like disposals and spinoffs do not materialise in the next 12-18 months, we do not discount another potential cash call. Post-briefing, we continue to reiterate our MP call on WCT with a lower TP of RM1.58 (previously RM1.85), despite our TP upgrade yesterday as we factor in the potential new placement of shares coupled with a wider discount to our Sum-of- Parts given the disappointment of a potentially dilutive cash-call.

Source: Kenanga Research - 27 May 2016