WCT held its first analyst briefing after WCT Capital Sdn Bhd disposed off its 19.7% stake in the group to Tan Sri Lim Siew Choon. The analyst briefing was conducted by Mr Chong Kian Fah, the General Manager for Corporate & Finance Department. The turn-up was higher than usual as fund managers and analysts were present to get a better sense of the group’s business direction and stewardship under new major shareholder.

Changes in Boardroom but Business as Usual

Subsequent to the change in major shareholder, Dato’ Capt. Ahmad Sufian (Independent Chairman), Mr. Taing Kim Hwa (Managing Director), Mr. Wong Yik Kae (Executive Director) and Mr. Choo Tak Woh (Independent Director) have resigned from the Board. They are replaced by Tan Sri Lim Siew Choon (Executive Chairman), Dato’ Lee Tuck Fook (Non-independent non-executive director), Tan Sri Marzuki (Independent Director) and Datuk Ab Wahab (Independent Director).

With these changes, the operation of the group will be led by Tan Sri Lim. For a smooth transition, Mr. Taing will serve as the group advisor until June 2017. Other than the changes above, the business, management and staff remain status quo.

Construction Division Dragged by Additional Costs in Building Projects

Excluding forex impact, the construction division incurred a marginal loss of RM2.8mn in 3Q16. The management explained that it was due mainly to the additional costs incurred in some buildings projects that include MITI HQ, government building project in Qatar, and a building project in Putrajaya.

Currently, the construction division has an outstanding order book of RM4.4bn (see Exhibit 1) which could last for another 3 years. Its tender book stands at RM3.0bn. It is bidding for highway projects, government buildings and hospitals, civil works at RAPID Pengerang and civil works at Tun Razak Exchange.

Outlook for Property Market Remains Challenging

Its property division recorded RM281mn of property sales in 9M16, compared with RM207mn of property sales achieved in 1H16. The sales were largely contributed by the Waltz Residence in Taman OUG, which recorded about 40% take-up rate. Unbilled sales improved from RM529mn in 2Q16 to RM562mn.

The management previously guided sales target of RM600mn for FY16. We maintain our FY16 property sales assumptions of RM500mn.

Disposal of Shopping Malls instead of REIT IPO?

Instead of REIT IPO, the group is now looking at disposing BBT Shopping Mall and Paradigm Mall in PJ to Pavilion REIT, which is a more straight forward and less complex route. It is to realise its investment properties and to bring down the gearing of the group. If it progresses smooth, it may take about 6 months for the disposal to take place

Others

Down South, the group targets to open Paradigm Shopping Mall in JB, which has a projected retail lettable area of 1.3m sqft in 2Q17. We think the shopping mall could leverage on the brand name of Pavilion, whereby Tan Sri Lim is the Executive Chairman of Pavilion REIT, to secure quality tenants for its mall.

Separately, the management clarified that the expected sales proceeds from the disposal of Ascent Paradigm office block will be retained at JV company to fund the remaining development at Paradigm PJ. The office tower is currently 72% tenanted with an average rental rate of slightly below RM5.00psf. The group has a capital commitment of RM341mn in the near term mainly for TRX land and development in Paradigm JB.

The group is negotiating with foreign investor to take up a substantial stake in the TRX land. This would lighten the capital commitment by about RM200mn.

Forecast

Adjustments were made to reflect the lower-than-expected contribution from its construction division. As a results, earnings forecast for FY16 was cut by 14.0%.

Valuation

Maintain SELL call on WCT with an unchanged target price of RM1.54, based on unchanged 14x CY17 construction earnings and 10x CY17 property earnings.

Source: TA Research - 23 Nov 2016