CIMB Research retains Hold on WCT, ups target price

WCT and Bina Puri are among the more active contractors in Sabah over the past few years

KUALA LUMPUR:  CIMB Equities Research remains upbeat on WCT Holdings Bhd’s infra outlook but this is offset by property sales risks.

It said on Wednesday the group’s next phase of de-gearing initiative is the REIT deal in mid-2017.

“Property market remains tough with no new launches planned; RM500mil internal sales target could be at risk if YTD sales of RM133mil lose momentum.

“Job visibility looks good, with more LRT3 and MRT 2 packages up for tender,” it said.

However, WCT’s share placement overhang and uncertainty about the REIT deal could cap upside to share price. We maintain our Hold call but with a higher target price of  RM2.10 (from RM2),” it said.

CIMB Research contacted WCT’s management for updates on the group’s outlook.

The key points: 

1) Degearing initiative continues to be the priority with a REIT deal to be launched potentially in mid-2017. Other land bank disposal moves are also on the cards;

 2) RM500mil property sales target remains intact amidst the still-challenging market; no new launches planned in 2H17; 

3) WCT is upbeat on job flows and targets to secure a larger value LRT3 package;  and
 
4) Second tranche of the share placement is likely in 2H17, we believe.

CIMB Research said with 0.9 times net gearing level that is at the higher-range of comparable contractor/property developers, its medium term focus continues to be the group’s REIT plans. 

“Unchanged guidance was that the RM1.1bil REIT deal could be realised either by 1) a formation of a new REIT vehicle, or 2) an outright asset injection into an existing REIT, into the much talked-about Pavilion REIT. 

“Under the new REIT vehicle scenario, WCT will likely retain a 30-40% stake. We expect more developments by mid-2017,” it said.

It also pointed out WCT recently clinched an RM186mil contract to undertake package TD1, which is to build the Johan Setia Depot (Phase 1) for the LRT3 project - the group’s first contract win for 2017. 

WCT has also tendered for other larger value LRT 3 packages worth RM400mil to RM500mil. It is also bidding for more MRT 2 jobs, though likely smaller than the RM893mil package V204 secured in late 2016.

“Management remains upbeat about its job flow prospects in 2H17. We forecast RM1.5bil job wins in FY17,” it said.

CIMB Research said WCT had a view that it is still a tough market for property sales with no new launches planned for the year, apart from clearing its existing RM1bil unsold inventory. 

Property sales YTD, however, is off to a good start with RM133mil sales secured under its repricing and rebate sales strategy. The challenge now is to sustain and boost property sales to meet its internal target of RM500mil. 

“This could compromise margins for property products with higher land cost outside its townships in Klang, in our view,” it said.

As for the REIT plan, it said that based on its optimistic scenario and assuming no delays of the REIT deal, WCT should be able to raise RM1.2bil to RM1.3bil from the REIT (estimated RM660mil in net proceeds), RM300mil to RM400mil from the land sale and RM221mil from the share placement by end-2017.

“We expect WCT’s strong job flow outlook to be mitigated by property sales risks and uncertainty surrounding its REIT plans. We raise our fully diluted realised net asset value (RNAV) based target price as we update for the value of selected land banks (still based on 30% discount to RNAV),” it said.