WCT has confirmed the disposal value of its three retail mall assets at RM2.44b for a REIT listing, to be named Paradigm REIT in 1QFY25. The valuation exceeds our previous assumption of RM1.02b, prompting us to upgrade our TP by 22% to RM1.43 (from RM1.17). We are positive on this REIT listing as it marks the start of a re-rating exercise. The next focus should be on its property development segment, supported by a stronger balance sheet post the REIT listing. Upgrade to OUTPERFORM.

Disposing three assets worth RM2.44b via a REIT. Yesterday, WCT confirmed plans to monetize its three retail properties assets namely Bukit Tinggi Shopping Centre, Paradigm Mall Petaling Jaya and Paradigm Mall Johor Bahru for a total valuation of RM2.44b to a newly established REIT called Paradigm REIT. The REIT will be listed on the Main Market of Bursa Malaysia. Paradigm REIT will fund the assets injections by issuing 1.6b new units at an assumed price of RM1.00, and a cash payment of RM837m. The REIT listing is expected to be completed in 1QFY25.

A de-gearing exercise. We are positive on this move as the REIT listing could initiate a re-rating exercise. Approximately 98% of the proceeds (estimated at RM1.40b) from the listing will be used to pare down borrowings, leading to an expected annual interest savings of RM50m. WCT’s net gearing is also anticipated to decrease by more than half to 0.33x (pro forma for audited FY23A) from 0.73x previously.

Outlook. We believe WCT is poised for a better FY24 on the impending roll-out of various public infrastructure projects such as: (i) MRT3 (RM45b), (ii) Penang International Airport expansion project, (iii) Pan Borneo Sabah, (iv) Subang Airport Regeneration plan (RM3.7b), and (v) various government hospitals. Furthermore, the de-gearing exercise should strengthen its balance sheet, enabling growth in its property development segment through delivery of value-enhancing projects.

Forecasts. Pending completion of the REIT listing exercise, we are maintaining our estimates.

Valuations. We upgrade our SoP-driven TP by 22% to RM1.43 (see Page 2) from RM1.17, solely reflecting the REIT listing (RM2.44b vs. our previous assumption of RM1.02b) with an unchanged: (i) 12x construction FY25 PER, which is at a discount to 20x we ascribed to large contractors given WCT’s much smaller size, and (ii) a 75% discount to its property RNAV, which is at the steeper end of our property company valuation to reflect the low realisability of WCT’s GDV. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like WCT for: (i) the improved prospects of the local construction sector with the anticipated roll-out of public projects, (ii) the recovery of its construction profits with the completion of low- margin legacy projects, and (iii) a potential re-rating on a lower risk premium as it de-gears its balance sheet via land disposals as well as the listing of Paradigm REIT. As such, we upgrade the stock to OUTPERFORM from MARKET PERFORM. Further re-rating could occur with improved property launches funded by a strong better balance sheet post-REIT listing

Risks to our call include: (i) weak flow of construction jobs from public and private sectors, (ii) prolonged slowdown in the local property market, (iii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and (iv) rising building material cost.

Source: Kenanga Research - 19 Sep 2024