WCT (9679) - WCT Holdings - Cash call and bonus warrants
Target RM1.69 (Stock Rating: HOLD)
WCT’s surprised us with a 1-for-10 rights issue and 1-for-5 bonus warrants. The rights issue would dilute FY15-16 EPS by up to c.6%. 98% of the rights proceeds of up to RM143m is earmarked for working capital, largely for its construction business. While rights issues are typically short-term negative for share prices, we keep our Hold call as the 2% downside to the theoretical ex-all target price of RM1.51 is offset by the 4% dividend yield. We retain our EPS forecasts and target price (40% discount to RNAV). Medium-term prospects hinge on domestic job flows, which should offset the subdued outlook for property development. Switch to Muhibbah Engineering.
What Happened
WCT has proposed a 1-for-10 renounceable rights issue (@RM1) and a 1-for-5 bonus issue of warrants (indicative post-rights exercise price of RM1.71). The rights issue will raise up to RM143m, 98% of which will be working capital, mainly for the group's ongoing construction works, i.e. payment to suppliers and subcontractors. The rest of the cash will be used for expenses related to the deal. This exercise is expected to be completed in 3Q15.
What We Think
This news comes as a surprise to us. Management briefly explained that the main aim is to recoup funds used for previous landbanking, particularly in Rawang, and not for expansion. The bulk of the RM143m proceeds will be used to sustain working capital for its ongoing construction jobs, backed by an unbilled order book of RM3.9bn which includes the recent contract win in Qatar. The rights issue is negative as it is estimated to dilute FY15-16 EPS forecasts by c.6% due to expansion of the share base (including dilution from existing warrants and ESOS) to as much as 1.6bn shares (fully diluted). The rights issue including the bonus warrants would dilute RNAV by 11% (see Figure 2). Based on the group's proforma numbers, gearing is estimated to fall from 0.87x to 0.64x as a result of the rights issue.
What You Should Do
Rights issues are typically negative for share prices but support longer-term strategies. We keep our Hold recommendation as the 2% estimated downside to the theoretical ex-all FD target price of RM1.51 (40% RNAV discount) from the ex-all price of RM1.55 is offset by WCT's sustainable 4% dividend yield. We remain cautious about the group's property development outlook this year but this is balanced by the RM2bn targeted total contract wins in 2015, largely driven by domestic works.
Source: CIMB Daybreak - 17 March 2015
Target RM1.69 (Stock Rating: HOLD)
WCT’s surprised us with a 1-for-10 rights issue and 1-for-5 bonus warrants. The rights issue would dilute FY15-16 EPS by up to c.6%. 98% of the rights proceeds of up to RM143m is earmarked for working capital, largely for its construction business. While rights issues are typically short-term negative for share prices, we keep our Hold call as the 2% downside to the theoretical ex-all target price of RM1.51 is offset by the 4% dividend yield. We retain our EPS forecasts and target price (40% discount to RNAV). Medium-term prospects hinge on domestic job flows, which should offset the subdued outlook for property development. Switch to Muhibbah Engineering.
What Happened
WCT has proposed a 1-for-10 renounceable rights issue (@RM1) and a 1-for-5 bonus issue of warrants (indicative post-rights exercise price of RM1.71). The rights issue will raise up to RM143m, 98% of which will be working capital, mainly for the group's ongoing construction works, i.e. payment to suppliers and subcontractors. The rest of the cash will be used for expenses related to the deal. This exercise is expected to be completed in 3Q15.
What We Think
This news comes as a surprise to us. Management briefly explained that the main aim is to recoup funds used for previous landbanking, particularly in Rawang, and not for expansion. The bulk of the RM143m proceeds will be used to sustain working capital for its ongoing construction jobs, backed by an unbilled order book of RM3.9bn which includes the recent contract win in Qatar. The rights issue is negative as it is estimated to dilute FY15-16 EPS forecasts by c.6% due to expansion of the share base (including dilution from existing warrants and ESOS) to as much as 1.6bn shares (fully diluted). The rights issue including the bonus warrants would dilute RNAV by 11% (see Figure 2). Based on the group's proforma numbers, gearing is estimated to fall from 0.87x to 0.64x as a result of the rights issue.
What You Should Do
Rights issues are typically negative for share prices but support longer-term strategies. We keep our Hold recommendation as the 2% estimated downside to the theoretical ex-all FD target price of RM1.51 (40% RNAV discount) from the ex-all price of RM1.55 is offset by WCT's sustainable 4% dividend yield. We remain cautious about the group's property development outlook this year but this is balanced by the RM2bn targeted total contract wins in 2015, largely driven by domestic works.
Source: CIMB Daybreak - 17 March 2015
