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WCT (RHB Research) maintain underperform; fair value RM2.55

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WCT

? A RM688m commercial project.

WCT has entered into a “milestone agreement” with Global Capital & Development (GCD) for the development of a RM688m commercial project on a 10.3-acre site in the Medini Business District, Medini, Iskandar. It will comprise, among others, a “media village cluster development to support the Pinewood Iskandar Malaysia Studios”.

The latest property project will boost WCT’s outstanding property GDV by 14% to RM5.7bn (see Table 2). WCT’s partner in the project, GCD, is the lead investor/concessionaire of the 1,625-acre Medini integrated city development in Iskandar, jointly owned by Khazanah and Mubadala, an investment arm of Abu Dhabi.

? A second property project in Medini.
The latest venture will be WCT’s second property project in Medini, Iskandar. Recall, in Oct 2009, WCT formed a 70:30 JV with Iskandar Investment to develop the RM600m 1Medini, a residential-cum-commercial property project comprising 1,332 condominium units and 68,800 sq ft of retail space on an 11-acre site in Medini, Iskandar. We are positive on the latest development as it enables WCT to boost its presence in the high-growth property market in Iskandar, assuming Iskandar is to take off as planned.

? Forecasts.
We are maintaining our forecasts that assume WCT to register property turnover and EBIT of about RM200m and RM60m per annum in FY12/10-12, underpinned by recurring sales at its existing township projects in the Klang Valley as well as contributions from new property ventures such as the latest project in Iskandar.

? Risks to our view.

The risks include:
(1) New contracts secured in FY12/11-12 coming in above our target of RM1.5bn per annum; and
(2) Better-than-expected construction margins.

? Maintain Underperform. We believe the prospects of the construction sector will be bright in 2011, underpinned by rising demand for contracting services on the back of a better job flow and tightening supply for contracting services as more and more industry capacity is locked up with new jobs. This will translate to reduced competition and hence, sector-wide margin expansion.

The job flow will come primarily from:
(1) The infrastructure development for the Greater KL National Key Economic Area (NKEA) under the Economic Transformation Programme (ETP) including the RM40bn MRT project;
(2) The RM7bn Ampang and Kelana Jaya LRT line extension project; and
(3) Various public projects earmarked for implementation under the 10th Malaysia Plan (10MP). However, upside in WCT’s share price is capped by rich valuations. Indicative fair value is RM2.55 based on 14x fully-diluted FY12/11 EPS of 18.2sen, in line with our benchmark 1-year forward target PER of 10-16x for the construction sector.


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