WCT Holdings Bhd
(Oct 10, RM2.08)
Maintain hold with target price of RM2.35: In the long term, WCT’s investment property portfolio will look promising, with over RM2.5 billion in assets by mid-2016. However, near-term earnings momentum is weak mainly due to the lack of contract wins in the past two years, prompting us to downgrade our earnings estimates.
But from 2015 onwards, we see a potential turnaround in earnings growth, mainly driven by growth in investment property income. By 2016, we expect 30% to 35% of the group’s earnings to come from recurring rental incomes.
Currently, WCT has a tender book of about RM4.6 billion, with the bulk in local projects (RM3.1 billion) and overseas projects (RM1.5 billion). Notable local construction jobs the group is eyeing include the construction of the Cochrane Mall (RM700 million to RM800 million), Tun Razak Exchange (TRX) earthworks (RM300 million to RM400 million) and further infrastructure jobs in Pengerang, Johor, worth about RM1.6 billion.
We believe that among these projects, WCT would have the upper hand in both the earthworks package at TRX and the infrastructure jobs at Pengerang, given its first-mover advantage at both sites.
The company is targeting for a tender win for its infrastructure jobs in Qatar. We understand the company’s competitive advantage in Qatar is greater now as most of the construction companies in Qatar are focusing on projects in Dubai (mainly for the Dubai Expo that will be held in 2020).
WCT’s undeveloped land bank stands at about 1,426 acres (577ha worth about RM25 billion in gross development value. However, we understand the company is constantly on the lookout to expand its land bank, mainly in the Klang Valley and selected areas in Johor Baru that offer opportunities for commercial developments.
Although there are a number of large malls coming up in Johor Baru, the company believes its Paradigm JB venture would have the upper hand, given its first-mover advantage. The Paradigm Mall is currently being constructed and is expected to be operational by the third quarter of 2016. We estimate this mall could be worth RM936 million to WCT with full-year earnings contributions of up to RM56 million at earnings before interest and taxes (Ebit) level.
Its 70%-owned Paradigm Mall Kelana Jaya, offering 680,000 sq ft in net lettable area, is about 98% tenanted at about RM7.50 per sq ft (psf), which is expected to rise 10% to 15% next year. Taking a one-year forward view on the value of the mall, we estimate a conservative surplus value of RM137.1 million could be added to WCT (assuming rental of RM8.40 psf, cap rate of 6% and construction cost of RM420 million).
Thus far, the [email protected] shopping mall is recording about 97,000 footfalls per day, or about 35 million visitors yearly. WCT is operating the concession of the mall for a period of 25 + 10 years.
However, due to a small accounting issue (relating to Malaysia Airports Holdings Bhd’s [MAHB] concession period for the airport) the asset needs to be amortised over 22 years. The amortisation over 22 years would cost WCT about RM30 million yearly against about RM20 million for a period of 25 + 10 years. Should MAHB obtain an extension of its concession, the upside to WCT could be at least RM7 million.
Currently, we estimate the mall rakes in RM5 million earnings before interest taxes depreciation and amortisation (Ebitda) for 2014, based on an occupancy rate of 80% and operations at slightly below eight months. The mall is expected to break even next year.
The company has about RM2.4 billion in planned launches for 2014, of which RM1.6 billion has been launched year-to-date. Projects that have been launched were mainly within the Klang Valley and have garnered about RM600 million.
We maintain our “hold” with a lower sum-of-parts based target price of RM2.35 (from RM2.50),after lowering our earnings forecast for next year. Our target price implies 15 times 2015F price earnings ratio. Although the company is packed with property investment value, we believe the value will be more appreciated only once the company begins to show stronger earnings growth, that is expected to come in 2015/16. — UOB Kay Hian, Oct 10
This article first appeared in The Edge Financial Daily, on October 13, 2014.