Last Friday, WCT announced that they are entering into a sale and leaseback arrangement with EPF for their office building “The Ascent” for a sale consideration of RM347m. Neutral on the announcement and expect its net gearing to come down to 0.67x. No changes to our FY16-17E core earnings but lowered FY17E non-core earnings by 4.2%. Maintain UNDERPERFORM and Target Price of RM1.58.

The News. Last Friday, WCT announced that they will be entering into a sale and leaseback arrangement with EPF for “The Ascent” which includes retail lots, a concourse level, office space from Level 2 to 31 and 865 carparks for a purchase consideration of RM347m. The Ascent forms part of the Paradigm integrated development located in PJ. EPF currently owns the other 30% of The Ascent through Jelas Puri S/B (JPSB), which is jointly owned by WCT and EPF (70:30).

Disposal of office space. We were not surprised and neutral with the announcement as such disposal has always been part of the group’s de-gearing plan. Post disposal of The Ascent, it would further lower its net gearing from 0.80x (1H16) to 0.67x.

Earnings forecast. While we make no changes to our FY16-17E core earnings, we lowered our FY17E non-core earnings down by 4.2% to RM182.3m as we have factored in potential losses arising from the disposal as it is transacted below its net book value of RM355.0m.

Outlook. Currently, WCT has an external outstanding order book of c.RM5.2b which provides earnings visibility for the next 2.5-3.0 years. Job prospects currently are underpinned by contracts from LRT3, Kwasa Damansara and TRX, which is likely to flow in from FY17.

Maintain UNDERPERFORM. No changes to our UNDERPERFORM call with an unchanged TP of RM1.58 based on SoP. Our UNDERPERFORM call hinges on WCT’s co-founders exit as the change in major shareholder poses uncertainty for the group in terms of business directions in the mid-to-long-term, and we are still anticipating possible cash calls for its working capital considering they have debt covenants to be met. To recap, WCT undertook a rights issuance to raise up to RM143.0m last year for its working capital.

Source: Kenanga Research - 14 Nov 2016