WCT’s Subang Skypark deal fails to excite

KUALA LUMPUR (April 4): Shares in WCT Holdings Bhd closed lower yesterday as news that it was acquiring a controlling 60% stake in the operator of the Skypark Terminal at the Sultan Abdul Aziz Shah Airport in Subang, Selangor failed to excite investors.

The stock closed two sen or 1.64% lower at RM1.20, giving it a market capitalisation of RM1.69 billion. Year to date (YTD), it has fallen 26% from RM1.62 on Dec 29, 2017.

At first glance, most analysts believe WCT’s acquisition of the 60% stake in Subang Skypark Sdn Bhd for RM44.56 million makes strategic sense for the group, given the synergistic effects, but several raised concerns over its balance sheet and time taken to see returns.

AmInvestment Bank analyst Joshua Ng estimated that the acquisition will increase the group’s net debt and gearing of RM2.76 billion and 0.88 times respectively as at end-December 2017 to RM2.88 billion and 0.92 times.

“We are at best only neutral on WCT’s latest acquisition. While we see value in the commercial/retail area in the Skypark Terminal that may be poised for a positive rental reversion backed by rising passenger traffic, and the car park area with development potential, these may take time to realise. The acquisition cost, coupled with the consolidation of Subang Skypark’s debt, will add further strain on WCT’s balance sheet,” he wrote in a note to clients yesterday, adding while Subang Skypark is reasonably profitable at the operating level, its profitability at the net level is insignificant due to interest expense arising from some RM80 million debt.

He maintained a “hold” call on WCT, but has cut his fair value by 17% to RM1.38 from RM1.66 previously as he increased the discount to its property revised net asset value to 40% from 25% to reflect a prolonged slowdown in the property market.

When contacted, Affin Hwang Capital senior associate director Loong Chee Wei said that despite a higher net gearing, such acquisitions are “part and parcel” of WCT’s property development business.

“It just means that it has more projects to develop now while continuing with its restructuring efforts to reduce gearing, such as the proposed 10% share placement, plans to divest non-core assets, and clearing property inventories to improve its financial position,” he told The Edge Financial Daily.

Loong said buying new pieces of land also carries on the theme of “restructuring” for WCT’s property development portfolio as in theory, its focus from township development to mixed commercial development would benefit WCT given the generally faster development cycle for the shifting company.

“The profit contribution will not be significant this year as the earnings contribution will not be immediate. The earliest launch will probably be next year as WCT will need time to relook [at] and submit new development plans for approval before redeveloping the commercial area of Subang Skypark,” added Loong. On Monday, WCT said the acquisition enables it to potentially develop the car park area of Subang Skypark into a mixed commercial development project.

RHB Research Institute analyst Tay Yow Ken believes WCT could extract value from the acquisition through enhancing the retail component of Skypark Terminal by leveraging on its experience in managing Gateway@klia2 in Sepang, which is more than three times larger in terms of net lettable area.

“Besides the retail component, WCT could develop an 11-acre (4.45ha) plot of land located opposite Skypark Terminal, currently used as a parking lot,” he said, leaving his earnings forecasts unchanged as he expects the increase in interest expenses for the deal to be largely offset by Subang Skypark’s profit contribution.

“It remains premature to gauge the enhancement potential of Skypark Terminal and the development potential of the parking lot land. Overall, we are slightly positive on the deal, as we see some synergistic potential in applying its expertise in airport retail operations,” he added.

HLIB Research analyst Jeremy Goh said WCT’s share price fall of 26% YTD provides an opportunity to accumulate. WCT remains backed by a significant surplus land value of RM1.6 billion, he added.

While there are no changes to his earnings forecasts, he has cut his target price for WCT to RM1.81 from RM2.27 on potential delays in some of its de-gearing initiatives.

This article first appeared in The Edge Financial Daily, on April 4, 2018.

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