Yesterday, WCT announced their first land banking deal, acquiring 3.14 acre of land in Mont Kiara for a total consideration of RM80.0m, which seems to be fair implying land cost to GDV ratio of 13%. No changes in earnings estimate. Maintain UNDERPERFORM with higher SoP-driven Target Price of RM1.83.

First land banking deal of the year. The acquisition of 99.98% in Kekal Kirana Sdn Bhd (KKSB) allows WCT to acquire a parcel of land in Mont Kiara near Pavilion Hilltop, and Seni Mont Kiara measuring 3.14acres near Seni Mont Kiara, and Pavilion Hilltop for a total consideration of RM80.0m, which is the first land deal of the year for WCT. The approved proposed development of 336 units of serviced apartments, a clubhouse and 4 units of villas, imply a density ratio c.108 units/acre. However, management plans to make revisions to the proposed development into 3 blocks of serviced apartments comprising 408 residential units, implying density ratio of 130units/acre with an estimated GDV of RM600.0m.

Mildly positive. While this particular acquisition would raise its 4Q16 net gearing of 0.91x to 0.94, we are mildly positive on the deal as this marks WCT shift of focus on its development strategy to prime areas, while continuing its de-gearing through the disposal of land that is further away from Kuala Lumpur. Furthermore, the land acquisition consideration of RM80.0m (RM584psf) implies a land cost to GDV ratio of 13%, which is still within an acceptable range of 15-20%. That said, the implied cost of RM584psf seems fair as it is rather close to the asking price of RM600psf for that area. Based on 408 units of service apartments with an estimated GDV of RM600.0m, we anticipate each unit to be price at the range of RM1.4m-RM1.5m, catering for the higher end segment, which we believe WCT would be able to leverage on Tan Sri Desmond Lim’s strength and experience in such development.

FY17-18E earnings unchanged. While management have the intention to launch this project in 2018, we are keeping our FY17- 18E core earnings unchanged at this juncture as we have yet to factor in any earnings contribution from the project given that they are still in the midst of applying for a higher density ratio, which might take longer than expected.

Outlook. Its outstanding order book stands at RM5.2b, providing earnings visibility for the next 2.5-3.0 years. We are anticipating that they may bag more jobs from LRT3 on the viaduct packages in the medium-term. Other job prospects currently are underpinned by contracts from Kwasa Damansara and TRX, which are likely to flow in from FY17.

Maintain UNDERPERFORM. No changes to our UNDERPERFORM call, but we upgrade our SoP-driven Target Price to RM1.83 (previously, RM1.80) after factoring the abovementioned project into its property RNAV. We believe that WCT has to strive hard to deliver earnings and to continue with its degearing exercise while restraining from undergoing more cash-calls after a recent placement exercise. That said, it is traded at fairly rich valuation of 24.0x FY17E FD PER which is higher compared to the other big boys that are trading at an average of 20.2x. Hence, we continue to maintain our UNDERPERFORM call on the stock

Source: Kenanga Research - 28 Apr 2017