WCT to reap about RM60m profit from TRX contract win

KUALA LUMPUR (Oct 21): WCT Holdings Bhd is expected to reap only about RM60 million in pre-tax profit from the RM754.8 million contract it had clinched from 1MDB Real Estate Sdn Bhd (1MDBRE) to build infrastructure and roads at the Tun Razak Exchange (TRX) here, said analysts.

They also said earnings visibility will only kick in earliest by 2018 when the infrastructure and roadworks are completed.

“Margins for construction contracts normally range from 8% to 10%. Assuming a pre-tax profit margin of 8%, profit over the [TRX] contract period comes up to about RM60 million,” AllianceDBS Research analyst Chong Tjen-San told The Edge Financial Daily yesterday.

“While that is insufficient to cover WCT’s acquisition of several plots of land in TRX for RM223 million, we do not expect any significant strain on its balance sheet as payment will be made on a milestone basis [against the infrastructure and road contract] and will be completed by the fourth quarter of 2017,” he said.

On Monday, WCT was awarded a RM754.8 million contract from 1MDBRE involving infrastructure and roads at TRX. It also announced that it will be acquiring several plots of land in the TRX totalling 1.65 acres (0.67ha) from 1MDBRE for RM223 million or RM3,097 per sq ft (psf).

Chong said while he does not expect any huge capital outlays for the land purchases as the payment of the land will be offset by the payment from its infrastructure works contract, WCT still requires high capital expenditure for its Paradigm Mall development in Johor Bahru, which is slated to open by September 2016.

As at June 30 this year, WCT’s total borrowings stood at RM2.45 billion, with cash and bank balances at RM594.26 million, leaving it with a net gearing of 0.8 times.

On the price of the TRX land, Chong considers it to be expensive even though most other analysts deem it as “relatively fair” compared with the price transacted by Lembaga Tabung Haji of a 1.5-acre land adjacent to this plot for RM2,800 psf and Affin Bank Bhd’s 1.25-acre piece of land for RM4,683 psf.

Chong also said WCT may require a longer time to monetise the land, with the initial launch expected to be in 2018 at the earliest when the infrastructure works are finished.

“The permissible plot ratio is 10.8 times translating into a total gross floor area of 775,002 sq ft. GDV (gross development value) is guided at RM1.1 billion, which works out to average selling price of RM1,400 psf,” Chong said.

“We don’t know what is going to happen in 2018; dynamic of this land deal remains to be seen; it is still a greenfield development after all. But as of now, WCT is not considered reputable yet in developing high-end products,” he added.

WCT has proposed to develop high-end serviced apartments with retail components on the TRX land with an estimated GDV of RM1.1 billion.

An analyst from PublicInvest Research concurred, adding that the more “meaningful” catalyst for WCT moving forward would be listing of its real estate investment trust and the receipts of compensation from the recent Dubai’s arbitration win.

WCT on July 8 won an arbitration related to the cancellation of construction contract in the Nad al-Sheba racecourse project in Dubai with a compensation of RM1.2 billion.

“Having said that, in terms of [construction] job replenishment, they have done a very good job, it is like a turning point from the last few years,” the analyst said.

Meanwhile, HLIB Research has upgraded its rating on WCT from a “sell” to a “hold” on the back of strong job wins and a healthy order book level. “However, the stock is not an outright buy as we remain concerned on its patchy quarterly earnings delivery and high net gearing.”

It noted that WCT’s year-to-date job wins have amounted to RM1.8 billion, almost double that achieved in 2014 of RM993 million.

WCT’s share price ended the day three sen or 2.11% lower at RM1.39, down from its intraday high of RM1.45 yesterday, with a market capitalisation of RM1.7 billion.

This article first appeared in The Edge Financial Daily, on Oct 21, 2015.