This article first appeared in The Edge Malaysia Weekly on June 5, 2017 - June 11, 2017

MALTON Bhd will be holding an intriguing extraordinary general meeting this Wednesday, June 7.

The sole purpose of the EGM is for minority shareholders to approve a mandate for Malton to undertake up to RM2 billion worth of recurrent related-party transactions (RRPT).

But for that huge sum of money, the circular to shareholders that was released on May 23 did not specify who the related party might be.

The obvious candidate, however, is WCT Holdings Bhd.

Recall that in November last year, Tan Sri Desmond Lim Siew Choon acquired a 19.67% stake in WCT from its long-serving managing director, Peter Taing Kim Hwa, and co-founder Wong Sewe Wing.

Lim is Malton’s executive chairman with a 35.34% stake in the company.

Keep in mind that at WCT’s AGM last week, shareholders passed a resolution that would also allow WCT to undertake RRPTs.

The resolution allows WCT to receive contracts from RPTs of up to RM3 billion, and to award contracts to RPTs worth up to RM1 billion. In both circulars to shareholders, WCT and Malton specifically identify RPTs as transactions involving entities where Lim has a directorship or direct/indirect substantial shareholding.

Of course, Lim is also the chairman and executive director of Pavilion REIT, in which he has a 27.97% stake.

However, it is not possible that the Pavilion REIT has the capacity to be involved in this particular RRPT.

This is because WCT’s and Malton’s circulars also identified the nature of the RRPT as “provision of construction project management and construction related services”.

Note that it isn’t uncommon for companies to seek shareholders’ mandate to undertake RRPT. After all, such transactions should still involve due process — tenders and quotations subject to the company’s regular policies and procedures.

It simply speeds up the process by preemptively securing shareholder approval.

That said, Malton’s RRPT circular is curious because of the expected size of the RRPT. Malton’s market capitalisation alone is only RM737.4 million, based on the closing price of RM1.40 last Thursday.

It is also interesting to note that Malton’s share price is trading relatively close to historic highs.

Over the past one year, the group’s share price has shot up 183% to a record RM1.78 on May 16. Channel checks in the industry reveal that the surge in trading interest has been largely driven by speculation that Malton is looking to bag some major contracts.

However, Malton itself is simply a property developer without the in-house construction capacity for large projects.

For the 12-months ended March 31, 2017, Malton booked RM547.38 million worth of revenue from its construction segment. However, RM363.23 million worth of the work came from internal sales — from the group’s property development arm.

External construction revenue only made up 26.2% of the group’s total revenue of RM702.83 million.

In stark contrast to Malton, WCT has a market cap of RM3 billion. For the 12-month period ended March 31, WCT’s construction revenue totalled RM2.98 billion, of which RM1.57 billion was external sales. In turn, that made up 81% of WCT’s total revenue.

Just like Malton, WCT has seen its share price climb over the past one year, especially after Lim’s emergence in the company.

In fact, WCT’s share price has closely tracked Malton’s. Just like Malton, WCT’s share price hit a high on May 16, closing at RM2.32 apiece. That is over 51.6% higher than a year ago.

Just like Malton, WCT’s share price has slipped since then, down 6.9% to RM2.16 as at last Thursday.

While it could be written off as mere coincidence, it is clear that the market has linked the two stocks together via the Desmond Lim factor.

The emergence of the RRPT mandate for a whopping RM2 billion only serves to reinforce this perception. Of course, Malton still needs to bag a construction job before it can employ WCT in an RRPT.

To this end, there has been some speculation recently.

Recall that a few business papers last month reported that Malton was a likely candidate to take over the Bandar Malaysia project after the Ministry of Finance took it away from Tan Sri Lim Kang Hoo’s Iskandar Waterfront Holdings Sdn Bhd.

Malton immediately denied that it was bidding for the Bandar Malaysia project and its share price subsequently fell, along with WCT’s.

That said, both companies are still priced at relatively rich valuations.

At RM1.40 per share, Malton is valued at 17.2 times earnings. That is more than double its five-year average PER of only 8.05 times.

Similarly, WCT is valued at 29.15 times earnings. This is double its five-year average PER of 13.28 times.

WCT boasts a sizeable tender book of RM10 billion in projects this year, including work from LRT3.

“During the post 1Q17 results briefing, management reiterated its bullish stance of meeting its RM2 billion to RM3 billion total contract wins in FY17,” CIMB Research wrote in a report last week.

However, CIMB itself has a slightly more conservative estimate, anticipating WCT will bag RM1.5 billion in jobs this year.

CIMB has a “hold” call on WCT with a target price of RM2.10.

On the flip side, it is not clear what jobs Malton could be bidding for at this juncture but it appears the market is pricing in a big contract.

However, it remains to be seen if Malton will meet this expectation.

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