WCT Holdings Bhd maintains that its gearing level is “still acceptable”. It also assures investors that it faces no cash flow issue, despite the fact that it has recently proposed a rights issue to raise some RM143.23 million to fund its working capital.

The proposed cash call, deemed a small exercise given WCT’s (fundamental: 0.6; valuation: 1.8) market capitalisation of RM1.58 billion, came as a surprise as the group was sitting on some RM950.84 million cash as at Dec 31, 2014.

The cash made up a big part of WCT’s current assets of RM2.72 billion, which was a healthy 1.68 times over its current liabilities of RM1.62 billion — most of which were in the form of short-term borrowings of RM584.11 million.

On such a premise, some have questioned WCT on the need for the one-for-ten rights issue, which could dilute earnings per share. However, analysts point to the group’s overall high gearing level that needs to be trimmed, at a time when property-related earnings could be facing pressure.

WCT’s net gearing level has spiked up significantly to a net total borrowing of RM1.48 billion or 0.65 times its shareholders’ funds as at Dec 31, 2014, from RM948.74 million or 0.42 times as at Dec 31, 2013.

As at Dec 31, 2014, the group’s short and long-term borrowings were RM584.11 million and RM1.85 billion, respectively.

“In the last five years, there was an aggressive expansion in landbanking as well as in the property investment and management segment. As a result, borrowings increased but the current gearing is still acceptable and within our internal targets,” WCT head of corporate and finance Chong Kian Fah tells The Edge.

The landbanking spree increased the group’s total assets by 12.1% to RM6.2 billion as at Dec 31, 2014. Some RM994.16 million worth of land is being held for development, compared with RM640.38 million previously.

However, total liabilities increased much more quickly by 19% to RM3.92 billion as at Dec 31, 2014, from RM3.28 billion the year before.

Chong explains that the group’s debt load will lighten by the end of this year. “The increase in short-term borrowings are in respect of a medium-term note which is due this year. The group has existing cash to repay [the loans],” he says.

In a recent note, CIMB Research said the rights issue is crucial in helping WCT to deleverage itself in the meantime.

“Rights issues are typically negative for share prices but support longer-term strategies,” says its analyst Sharizan Rosely, who has a “hold” call on the stock.

Ultimately, the cash call could be deemed as buying time while the group prepares to list some of its investment properties through a real estate investment trust (REIT).

Chong says plans for a REIT consisting of three retail malls are back on track, and that the assets’ value has appreciated thanks to the solid growth of its Gateway Mall at klia2. In January, WCT executive director Kenny Wong Yik Kae told reporters that the listing may take another year to finalise.

WCT’s three retail assets are the Bandar Bukit Tinggi Shopping Mall in Klang, Paradigm Mall in Petaling Jaya and the Gateway Mall, which it operates under a long-term concession agreement with Malaysia Airports Holdings Bhd.

While the other two are maturing assets, the mall at the new low-cost carrier terminal has only been in operation for less than a year. The mall is currently seeing 101,000 footfalls a day and has a 77% occupancy rate, notes Chong.  

“We are in the process of finalising the planning (of the REIT) and hopefully, we can list this year should we decide to proceed. The current valuation of the malls is about RM2.2 billion.”

The spin-off will lighten WCT’s financing burden and at the same time, shareholders of the parent company will stand to benefit via a possible distribution of the REIT units.

As the property sector outlook gets tough, analysts say it is crucial that the group begins deleveraging and monetising its assets as soon as possible.

Their view is that the new cash call will not only dilute earnings on a per-share basis, it is also indicative of WCT’s need for external financing to address typical working capital requirements.

“Any further delays in its reported REIT plans or launches of new property investments would likely strain WCT’s cash flows further,” says AmResearch analyst Mak Hoy Ken in a recent note.

In spite of the growth in assets and liabilities, decreasing margins and slower pre-sales from the property segment had a detrimental effect on WCT’s FY2014 earnings, with the group reporting a 36% drop in net profit to RM120.53 million, from RM189.75 million a year earlier.

Nevertheless, apart from the REIT exercise, several new catalysts may help improve confidence in the stock, which is currently trading at a steep discount to its book value per share of RM2.04.

Earlier this month, WCT clinched a RM1.2 billion infrastructure contract in Qatar, its biggest deal in years.

As a 70% partner in the joint venture, its share of the RM840 million worth of construction works brings its total order book to RM3.9 billion, an increase of 40%.

CIMB Research notes that WCT’s management is also looking to secure a further RM1 billion in domestic construction projects this year.

“Our main growth catalyst this year is the engineering and construction division. More projects are being rolled out in Malaysia this year and we are positive on the outlook of both local and domestic projects,” says Chong.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.

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