By Khairie Hisyam
Construction-based group WCT Holdings is tipped for a turnaround in fortunes after bagging a RM754.8 million infrastructure job at the Tun Razak Exchange (TRX) project, which boosted its order book by 28%.
The contract win, WCT’s fourth this year and second from TRX, may spark the group’s “recovery momentum for job flows” which may exceed expectations, said CIMB Research in a note this morning.
“A major turnaround is likely to continue going into 2016, backed by the group’s over RM4 billion in total jobs in tender,” said CIMB Research, tipping the group to be frontrunner for at least three major projects over the next 12 months by virtue of expertise and track record.
In a regulatory filing today, WCT said it received a letter of award from TRX owner 1MDB Real Estate Sdn Bhd on Oct 19, 2015 for the proposed construction and completion of infrastructure and roadway works at TRX.
The contract sum of RM754.8 million will be paid via three milestone payments based on work completed, said WCT further.
On the same day, WCT also signed a conditional sale and purchase agreement with 1MDB Real Estate to buy a 70.62-acre land plot at TRX for RM223 million. Payment for the land will be offset against corresponding milestone payment from 1MDB Real Estate for the infrastructure contract, said WCT.
At the noon bell today WCT was last traded unchanged at RM1.42 per share.
Boost at property’s expense?
While the job win is a big boost for WCT’s construction division, it may have come at the expense of its property arm which would have to wait for infrastructure works to finish.
“The initial launch will be in 2018 at the earliest when the infrastructure works are finished,” said AllianceDBS Research this morning.
However, CIMB Research feels the construction arm may be able to offset effects to WCT’s property business. WCT’s construction division “has been a big laggard in terms of order book growth compared to other contractors under our coverage,” said CIMB Research in a note this morning.
“The group’s order win track record has shown a major improvement over the last few months, which is a big turnaround compared to a year ago,” said CIMB Research. “A turnaround for construction should mitigate earnings risk for its property development division.”
For the second quarter ended June 30, 2015 (2Q15), WCT reported RM31 million in net profit from RM422 million revenue compared to RM34.3 million from RM401 million the year before. This represents a slightly shrinking margin from 8.6% to 7.3% year-on-year.
Assuming a conservative 8% pre-tax margin, Kenanga Research estimates the latest TRX infrastructure contract win to contribute some RM22.6 million to WCT’s bottom line.
Fair price?
At RM3,098 per square foot (psf), WCT’s land purchase at TRX came as a surprise to some analysts, who are of mixed opinion on whether it is a fairly priced deal.
WCT’s purchase price for the TRX land seems “relatively fair,” opined Hong Leong Investment Bank today, compared to past transactions at TRX.
“Recent land transactions at TRX happened at RM2,736 psf (Lembaga Tabung Haji) and RM4,699 psf (Affin Bank),” said Hong Leong. “As WCT’s price tag is within the rage of recent transactions, we deem it to be relatively fair.”
However, AllianceDBS disagrees, deeming the price as appearing to be expensive. “The land cost is at a premium to the recent land acquisition by Lembaga Tabung Haji.”
In terms of gearing, it is unlikely profit from the infrastructure job would be sufficient to cover the land acquisition cost and would thus require additional borrowing, said Hong Leong.
“The acquisition… will increase WCT’s already high net gearing of 81.2% to 91% on a pro forma basis,” said Hong Leong today.
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