WCT now free to list its investment property arm

WCT Holdings Bhd (Oct 18, 87 sen) 
 

Maintain buy with an unchanged target price (TP) of RM1.25: The ongoing court tussle between WCT Holdings Bhd (WCT) and AEON Mall Bukit Tinggi has come to an end after the two parties agreed to an amicable out-of-court settlement. On the other hand, the two parties have executed a supplemental lease agreement to further renew the lease period for another six years commencing Nov 21, 2017, subject to options to renew for a further two terms, comprising six and three years respectively.  

The end of the longstanding tussle between WCT and AEON is positive news for WCT as the company will continue to lease its investment property without having to search for a new anchor tenant, while expecting an increase in rental rate from 2019 onwards. In addition, AEON is agreeable to letting WCT proceed with its property development on the open car park space which will be linked to the mall. Recall that the conflicts began when these two parties were not able to mutually agree to a five-year lease extension upon the expiry of the initial 10-year lease on Nov 27, 2017, largely due to AEON’s disagreement with WCT’s plan to acquire part of the mall’s open car park space (front side) for a property development adjacent to the proposed light rail transit Line 3 station. 

The listing of its investment properties was put on hold previously as the rental dispute was debated in court. We expect the settlement with AEON would allow WCT to proceed with its initial plan to list its investment property arm scheduled in the second half of 2019, subject to the right valuations as part of its plan to improve its overall balance sheet. The company intends to reduce its net gearing of 0.98 times as of June 18 to 0.60 times by mid-2019 (post listing of investment properties). We estimate the potential listing of WCT’s investment properties (exclude Paradigm Johor) to probably raise proceeds of around RM250 million to RM300 million. 

We expect the property investment division’s earnings to improve in coming quarters, reflecting the full earnings impact of Paradigm Johor including the newly opened New World Hotel, Kelana Jaya (40% occupancy rate as at April 2018). When fully ramped up, Paradigm Johor’s profit before tax (PBT) contribution could reach close to RM60 million, assuming 90% occupancy and 70% PBT margin. At present, Paradigm Johor has 92% tenant occupancy with an average rent of RM6 per square foot (psf) (1.3 million square feet of lettable area) while the mall in Bukit Tinggi is fully leased out to AEON at an average rate of RM2.417 psf (one million square feet of gross lettable area). 

We maintain our “buy” call and TP of RM1.25. Our TP is based on a 20% discount to our sum-of-parts valuation of RM1.56 per share and implies 9.8 times 2019 forward price-earnings (PE) (historical mean PE: 15 times). — UOB Kay Hian, Oct 18 

This article first appeared in The Edge Financial Daily, on Oct 19, 2018.

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