Strategic investors to take up 10% of new WCT shares

Stake may also go to institutional investors

PETALING JAYA: The placees for the recently proposed placement of WCT Holdings Bhd new shares are likely to be “strategic investors”, according to AmInvestment Bank Bhd.

“We understand that the target placees will primarily be ‘strategic investors’ who are parties ‘friendly’ to the controlling shareholder.

“WCT does not rule out the possibility that the new shares may also go to institutional investors, or even the controlling shareholder himself,” the investment bank said in a report following a recent meeting with the group’s new management after the recent takeover by Tan Sri Desmond Lim Siew Choon.

Last week, the construction and property group announced a proposed placement of up to 125 million new WCT shares, which is equivalent to about 10% of its existing share base, at an indicative issue price of RM1.70 per share.

Based on this indicative price, the company hopes to raise about RM213mil, which will be used to pare down borrowings, as well as to fund working capital of its construction and property projects.

AmInvestment Bank said it understood that the new equity would help to improve the group’s gearing ratios, which would in turn help ease pressure on the credit ratings of WCT’s various debt instruments.

“Based on our estimates, the proceeds will reduce WCT’s net debt and gearing of RM2.4bil and 0.88 times as at end of the third quarter of financial year (FY) 2016 to RM2.2bil and 0.75 times, respectively, while the new shares will dilute its FY17 forecast earnings per share by 4.9%.”

StarBiz reported last week on the likelihood of the placement going to a strategic partner who will come in to add value to WCT and alleviate cashflow constraints.

Its placement exercise has caught the attention of some quarters as it seemingly values the company a little too low, considering Lim’s entry price less than three months back. The businessman had bought the 19.7% controlling stake from WCT’s original founders in a transaction valued at RM2.50 per share, for a total of RM614.28mil last November.

Lim also owns a 28% stake in Pavilion Real Estate Investment Trust (REIT) and a further 41.2% stake in Malton Bhd.

Other key takeaways from the meeting with WCT’s management is that WCT will be disposing of Paradigm Mall and BBT Shopping Mall in Klang to a REIT for cash, hence giving up the ownership of the assets entirely and is unlikely to hold any meaningful stake, if at all, in the REIT.

AmInvestment Bank said that given the common controlling shareholder, the market naturally expected Pavilion REIT to emerge the buyer for WCT’s shopping malls. However, it noted that WCT will likely leave its third existing mall, Gateway@KLIA2, as it is due to various title issues.

“The new management is also putting WCT’s existing land bank under review – land parcels considered “non-strategic” such as those located in the Klang Valley outskirts, including in Klang, will be sold.”

Under the new management, the group’s mixed development project on 60-acre prime land in OUG, Kuala Lumpur, will also shift to a lower gear to ensure that it will not pose direct competition to the nearby Bukit Jalil City, which is being developed by sister company Malton.

“From the standpoint of the controlling shareholder, it makes no sense to put onto the market, at the same time, two multi-billion ringgit integrated property projects in close proximity to each other, and both anchored by a huge retail mall. On the other hand, the new management is mindful of the substantial holding cost for the OUG land.”

The investment bank said it estimated the carrying value of the land has ballooned to about RM700mil (from the initial acquisition cost of RM450mil in 2012) after incurring various development costs and settling the conversion premium.

“We understand that the new management is toying with the idea of launching shop houses on certain parts of the land in order to bring in some immediate cashflow.”

Consistent with market speculation, WCT would be turned into the flagship public-listed property development company of Lim, and Malton and his private business ventures including Pavilion Kuala Lumpur and Pavilion Damansara Heights would eventually be brought into WCT’s fold, said the investment bank.

It said the consolidation of Malton and Lim’s private business ventures into WCT could potentially double its market capitalisation to above RM4bil, making WCT even more investable.

“However, the devil is in the details. We believe it is too premature to tell if the corporate exercises in the pipeline will be value-enhancing to WCT’s existing shareholders, as that depends largely on the structure and pricing of the assets and new shares to be issued pursuant to the corporate exercises,” said the investment bank, which maintains its “hold” call on the stock with a fair value of RM1.86.

Shares of WCT closed one sen up to RM1.80, giving it a market capitalisation of RM2.26bil.