5 May 2018

WCT Holdings Bhd
(May 3, RM1.23)
Maintain hold with a fair value (FV) of RM1.38: We maintain our forecasts, sum-of-parts (SOP)-based FV of RM1.38 and “hold” call. This follows the Kuala Lumpur High Court’s judgement in favour of WCT Holdings Bhd in its dispute with tenant AEON Co (M) Bhd with regard to the extension of the tenancy of the AEON Bukit Tinggi Shopping Centre.  

The court ruled that there was no renewal of the lease upon its expiry on Nov 23, 2017.

AEON will have to vacate the property, pay WCT damages calculated from Nov 23, 2017 to the date of vacant possession, as well as the RM10,000 legal cost.

AEON intends to file an appeal against the decision as well as an application for stay of execution.

We are slightly positive on the latest development. We believe that the court’s decision has strengthened WCT’s bargaining position versus AEON, assuming that there is still a chance that the parties would attempt to reach an amicable out-of-court settlement.

To recap, the key stumbling block for the parties to mutually agree to a five-year extension upon the expiry of the initial 10-year lease, which expired on Nov 27, 2017, is AEON’s rejection of WCT’s plans to take back part of the mall’s open car park space (main-road fronting, with a light rail transit [LRT] 3 station next to it) for property development.

In any case, given the experience accumulated by WCT in running shopping malls (Paradigm Mall in Petaling Jaya, gateway@klia2 and Paradigm Mall in Johor Baru) in recent years, we believe WCT will be able to find a replacement for AEON as the anchor tenant for the mall, if need be.

For FY17, we estimate that the mall contributed RM32 million or 11% of WCT’s total earnings before interest and taxes.

We maintain our view that WCT’s construction division has turned the corner with the award of key infrastructure projects such as mass rapid transit 2, LRT3 and the Pan Borneo Highway Sarawak recently.

However, its property division has not been spared the downturn in the property market and is weighed down by some RM550 million of unsold stock (1.8 times its property sales of RM305 million in FY17). WCT could be missing the window to list its matured investment properties under a real estate investment trust at good valuations against a backdrop of rising interest rates and surging supply of retail space in the market.

All these, coupled with WCT’s proposed placement of new shares of up to 10% of its existing paid-up capital, are likely to cap the upside to WCT’s share price over the near term. — AmInvestment Bank, May 3

Original Source: theedgemarkets