Acquiring land in Mont Kiara vide Kekal Kirana Sdn Bhd

WCT has subscribed for 9,998 shares in Kekal Kirana Sdn Bhd (KKSB), representing 99.98% of the enlarged issued and paid up share capital of KKSB, for a total subscription consideration of RM999.80 only. KKSB was in a net liabilities position of RM32.6k as of 30 September 2016.

KKSB is presently a dormant and it intends to undertake property development activities. On 7 November 2016, KKSB had entered in a sale and purchase agreement (SPA) with Wealthy Resources Sdn Bhd to acquire a piece of freehold land held under Geran 70957 Lot 67209, Mukim of Batu, Daerah Kuala Lumpur, measuring 3.14acres, for a purchase consideration of RM80mn. The SPA is expected to be completed in May 2017.

The land is located on the western side of Changkat Duta Kiara in Mont Kiara, Kuala Lumpur. It is surrounded mainly by commercial and residential properties. While a development order has been obtained for the proposed development of 336 units of serviced apartments, a clubhouse and 4 units of villas, KKSB intends to revise the development plan into 3 blocks of high-rise serviced apartments comprising 408 residential units, with an estimated GDV of RM600mn.

Our View

We are surprised by the acquisition as it is one of WCT’s main focuses to degear to alleviate concern on its net gearing level which is beyond comfortable threshold at 0.91x as of end-2016.

While the land purchase consideration appears reasonable at 13.3% of the estimated GDV, we are somewhat negative on the acquisition. This is given i) high gearing level of the group; ii) current challenging property market condition, particularly in the high-rise segment; iii) the outlook for high-end high-rise residential segment remains lacklustre; and iv) WCT is still having sizeable landbank with an estimated total acreage of more than 900 acres and estimated undeveloped GDV of more than RM25bn.

Impact

Other than housekeeping to our earnings model with minor changes (<±0.5%) to FY17 to FY19 earnings forecasts, we make no changes to our earnings estimates pending completion of the acquisition and further details on the development project.

Valuation

We roll forward our valuation base year to CY18 and trim our target price slightly from RM1.50 to RM1.49, based on 14x CY18 construction earnings and 10x CY18 property earnings. Maintain our SELL call on the stock.

Source: TA Research - 28 Apr 2017