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WCT Holdings Bhd (Jan 11, RM1.61)
Maintain buy with a higher target price (TP) of RM1.90: WCT Bhd’s executive director provided insights into the company’s three-year strategy for the financial year ending Dec 31, 2016 (FY16) to FY18. Its recovery process is ongoing to reduce its debt and increase its operating cash flow. Altogether, we reiterate our “buy” recommendation on WCT, with a revised TP of RM1.90 per share.
The key takeaway from the visit is that the debt reduction process is ongoing. WCT has taken measures to reduce its target total debt ratio from 1.06 times (RM3.9 billion) to 0.5 times (RM1.8 billion) in its new three-year business plan.
Ongoing measures include cost optimisation through capital expenditure minimisation of engineering machinery by project concentration, cash injections from the recent sale of Rawang land to UEM Sunrise Bhd for RM200 million, and the proposed listing of Paradigm PJ and Gateway@klia2 malls via a real estate investment trust (REIT) structure in the fourth quarter of FY16 (4QFY16) amounting to RM230 million.
Additionally, in the upcoming quarters, the proceeds of Lusail project in Qatar (from 1QFY16 to 2QFY17) amounting to RM903.9 million and the listing of its construction arm with a possible implied valuation of 1.2 times, which amounts to RM1.2 billion (book value: RM1 billion), in 3QFY17 would potentially be major catalysts to reduce its debt further and increase its working capital.
WCT’s financial headroom was reduced further when the property market softened in early FY15 and cash proceeds from property sales fell short of expectations. WCT’s strategy is to decrease its capital expenditure, which averaged around RM167.7 million for the past three years, by concentrating its new tenders in its current construction projects. This was evident by the concentration of tenders for new work packages for S-1, S-2 and S-4 of Kwasa Damansara township.
By applying the strategy of project concentration, WCT could have more advantage over other project bidders, due to a lower cost of tender from less mobilisation fees and performance bonds. Regularly, the combination of mobilisation fees and performance bonds ranges between 10% and 12% of the total contract value.
WCT’s total outstanding order book is RM2.87 billion, underlining sustainable earnings for FY16 and FY17. We believe that WCT’s order book replenishment target of RM1.15 billion for FY16 will be met through its concentration strategy.
We revised our FY16 and FY17 financial projections by imputing WCT’s strategy to decrease debt, improve its cash flow by minimising capital and development expenditure, and focusing its efforts on project concentration, and an uplift of the current value of its R2 and R4 land in Taman OUG, Kuala Lumpur, which will be launched in 2QFY16.
Challenges to our assumptions would be failure to obtain cornerstone investors for the proposed listings of its REITs and construction arm, failure to obtain credit-line facilities for project finance due to a high debt level, project cost overruns and delays in project implementation. — MIDF Research, Jan 11
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This article first appeared in The Edge Financial Daily, on Jan 12, 2016. Subscribe to The Edge Financial Daily here.
