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HLIB Research

PP 9484/12/2012 (031413)

WCT (BUY
INDUSTRY: NEWSBREAK

, EPS

OVERWEIGHT

7 September 2012 Price Target: RM3.31 ( ) Share price: RM2.54 Jarod Soon smsoon@hlib.hongleong.com.my (603) 2168 1073 KLCI Expected share price return Expected dividend return Expected total return Share price 1,618.0 30.3% 3.0% 33.3%

Bonus issue with warrants


News

Proposed: issuance of 3 bonus shares for every 20 existing shares; 1 Warrant D for every 5 existing shares; Bonus shares to be issued will not be entitled for Warrants D. The entitlement date will be determined later and the proposals are estimated to be completed by 4QCY12.

Comments

Adjustment factor The 3-for-20 bonus issue represents an adjustment factor of 0.8696x to WCTs share price and out TP upon ex-date. Warrant D The indicative exercise price of Warrant D is assumed at RM2.25, which represents a discount of ~2.2% to the theoretical ex-price of RM2.30 based on 5-day VWAP of RM2.6561. The new warrants have a 5-year lifespan and a conversion ratio of 1x. Warrants B & C Pursuant to the proposal, Warrants Bs (closing price: RM0.22, expiring on Apr-13) exercise price of RM2.50 will be adjusted to an indicative exercise price of RM1.85, while Warrants Cs (closing price: RM0.43, expiring on Mar16) exercise price of RM2.75 will be adjusted to an indicative exercise price of RM2.04. Both warrants have a conversation ratio of 1x. Dilution impact Based on our estimates, WCTs FY13 EPS onwards should be further diluted by ~12% arising from the conversion of new Warrant D. However, we believe that the dilution impact will be gradual over the lifespan of the warrant. Our calculation is based on the minimum scenario of new bonus shares to be issued as both warrants B & C are trading at a premium to its exercise price.
Information Bloomberg Ticker Bursa Code Issued Shares (m) Market cap (RM m) 3-mth avg. volume (000) Price Performance Absolute Relative Major shareholders WCT Capital EPF KWAP Free Float 1M 3.3 4.1

WCT MK 9679 821 2,085 1,501 3M 5.8 3.0 12M -1.2 -10.5

Risks

Execution risk; Regulatory and political risk (both domestic and overseas); Rising raw material prices; Unexpected downturn in the construction and property sector; and Failure in securing new sizable construction contracts. Earnings unchanged as we believe that the dilutive impact from the warrants will be gradual. However, we have reduced FY12-13 EPS by ~1.7% due to increased share base as of 30-Aug-12 arising from the conversion of ESOS and warrants.

19.7% 14.1% 6.2% 52.8%

Forecasts

Rating

BUY (

Positives: (1) Major contract wins; (2) Growing property investment income; (3) Strategic land banking exercise. Negatives: (1) Failure to secure new sizable projects; (2) Slower than expected take up rate for property launches.
Valuation

Summary Earnings Table FYE Dec (RM m) 2011A 2012E 2013E 2014E Revenue 1,539 1,693 1,970 2,185 EBITDA 274 255 309 333 EBIT 235 239 293 316 Profit Before Tax 208 217 274 297 PATAMI 162 183 206 209 EPS (sen) 20.2 22.3 25.0 25.4 FD EPS (sen) 14.7 16.4 18.4 18.7 Net DPS (sen) 7.5 7.5 7.5 7.5 Net DY (%) 3.0 3.0 3.0 3.0 P/E (x) 12.3 11.0 9.8 9.7 FD P/E (x) 16.9 14.7 13.2 13.1 P/B (x) 1.2 1.1 1.0 0.9 Net Gearing (%) 39.4 34.9 34.9 35.5 ROE (%) 11.0 12.0 12.3 11.5 ROA (%) 3.6 4.0 4.3 4.1 HLIB

Due to lower forecasted EPS for FY12-13, TP trimmed by 1.5% to RM3.31 from RM3.36 based on unchanged 14x average FY12-13 earnings. Ex-All TP of RM2.88.

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Figure #1

Warrant D Dilution scenario analysis


Without Dilution Effect from Warrant D 822.9 139.3 157.2 123.4 1,242.9 25.0 16.6 -33.8% With Dilution Effect from Warrant D 822.9 139.3 157.2 123.4 164.6 1,407.4 25.0 14.6 -41.5% Maximum Dilution 822.9 139.3 157.2 167.9 223.9 1,511.2 25.0 13.6 -45.5%

Nos. of shares as of Aug-12 (m) Conversion of Warrant B (m) Converstion of Warrant C (m) Bonus Issue (m) Covernsion of Warrant D (m) Enlarged nos. of shares (m) FY13 EPS (sen) Fully Diluted FY13 EPS (sen) % Dilution Impact HLIB

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Financial Projections for WCT (TP: RM3.31)


Income Statement FYE 31 Dec (RM m) 2010A Revenue 1,708.5 EBITDA 316.5 D&A (16.3) EBIT 289.8 Interest Income 10.4 Finance Costs (50.4) Associates 17.0 Exceptionals Profit Before Tax 266.8 Tax (47.9) Net Profit 218.8 Minority Interests (68.5) PATMI 150.3 Core Earnings Basic Shares (m) Core EPS (sen) FD EPS (sen) 150.3 786.9 19.1 16.2 2011A 1,538.6 274.2 (16.7) 234.9 22.5 (66.7) 16.8 207.5 (44.6) 162.9 (0.5) 162.4 162.4 805.2 20.2 14.7 2012E 1,693.1 254.9 (16.0) 238.9 22.6 (59.9) 15.0 216.6 (30.2) 186.3 (2.9) 183.4 183.4 822.9 22.3 16.4 2013E 1,970.1 309.3 (16.4) 292.9 18.9 (54.2) 15.0 1.0 273.5 (55.7) 217.8 (12.0) 205.8 205.8 822.9 25.0 18.4 2014E 2,185.3 332.9 (16.7) 316.2 15.5 (51.6) 15.0 2.0 297.1 (64.3) 232.8 (24.0) 208.9 208.9 822.9 25.4 18.7 Quarterly Financial Summary FYE 31 Dec (RM m) 2011Q2 2011Q3 Revenue 375.9 362.0 COGS (289.6) (276.4) Gross Profit 86.3 85.6 Operating Profit 64.1 63.4 Finance Costs (16.6) (16.0) Associates/JCE 3.3 5.6 Profit Before Tax 50.8 53.0 Tax (11.5) (12.0) Net Profit 39.3 41.0 Minority Interests (1.5) (1.7) PATAMI 37.8 39.3 Exceptionals Core Earnings 37.8 39.3 W. Ave. Shares (m) Core EPS (sen) FD Core EPS (sen) 802.1 4.71 4.40 806.9 4.87 4.63 2011Q4 485.1 (428.3) 56.8 64.8 (15.3) 4.7 54.2 (9.8) 44.4 3.6 47.9 47.9 807.5 5.94 5.76 2012Q1 341.6 (263.4) 78.2 62.2 (15.4) 4.8 51.6 (11.8) 39.8 0.3 40.0 40.0 813.9 4.92 4.91 2012Q2 396.8 (324.7) 72.1 59.5 (15.4) 3.8 47.9 (10.9) 37.0 2.5 39.5 39.5 822.9 4.80 -

Balance Sheet FYE 31 Dec (RM m) Cash Receivables Inventories Development Costs Associates PPE Others Total Assets Payables Total Debt Others Total Liabilities Shareholders' Funds Minority Interests Total Capital

2010A 1,162.4 1,754.3 74.4 228.8 177.0 292.2 864.5 4,553.5 1,362.6 1,632.9 26.5 3,022.0 1,256.4 275.2 1,531.5

2011A 804.0 1,735.0 51.4 295.5 159.5 277.1 1,235.9 4,558.5 1,368.4 1,383.8 51.9 2,804.1 1,471.8 282.6 1,754.4

2012E 704.2 1,920.7 69.2 295.9 174.5 286.3 1,235.9 4,686.7 1,514.6 1,239.9 51.9 2,806.3 1,594.9 285.5 1,880.4

2013E 553.3 2,209.1 80.6 410.4 189.5 292.1 1,235.9 4,970.9 1,747.4 1,135.1 51.9 2,934.3 1,739.1 297.5 2,036.6

2014E 480.4 2,428.2 89.4 573.9 204.5 296.3 1,235.9 5,308.6 1,925.4 1,124.5 51.9 3,101.7 1,885.4 321.5 2,206.9

Rates and Ratios FYE 31 Dec (RM m) 2010A PER (x) 13.3 FD PER (x) 15.7 Net DPS (sen) 7.5 Net DY (%) 3.0 BVPS (RM) 1.6 P/B (x) 1.4 NTA/Share (RM) 1.6 EBITDA Margin (%) EBIT Margin (%) PBT Margin (%) Net Margin (%) ROE (%) ROA (%) Net Gearing (%) 18.5 17.0 15.6 8.8 12.0 3.3 37.5

2011A 12.6 17.3 7.5 3.0 1.8 1.2 1.8 17.8 15.3 13.5 10.6 11.0 3.6 39.4

2012E 11.4 15.5 7.5 3.0 2.0 1.1 2.0 15.1 14.1 12.8 10.8 12.0 4.0 34.9

2013E 10.2 13.8 7.5 3.0 2.2 1.0 2.2 15.7 14.9 13.9 10.4 12.3 4.3 34.9

2014E 10.0 13.6 7.5 3.0 2.3 0.9 2.3 15.2 14.5 13.6 9.6 11.5 4.1 35.5

Cashflow Analysis FYE 31 Dec (RM m) 2010A EBITDA 316.5 Working Capital (95.3) Net Interest (45.6) Others (174.4) CFO 1.1 Capex (105.1) Purchase/Disposal 50.1 Associate & JV Others (0.2) CFI (55.2) Financing 634.5 Shares Issued 10.7 Dividends (59.1) Others (23.8) CFF 562.3 Net Cashflow 508.2

2011A 274.2 19.9 (58.8) (89.1) 146.1 (160.6) (129.7) 17.4 (272.9) (249.1) 86.4 (60.4) (29.3) (252.4) (379.2)

2012E 254.9 (2.0) (48.1) (30.2) 174.5 (70.0) (70.0) (143.9) (60.4) (204.3) (99.8)

2013E 309.3 (124.0) (45.2) (55.7) 84.4 (70.0) (70.0) (104.8) (60.6) (165.3) (150.9)

2014E 332.9 (155.0) (45.4) (64.3) 68.3 (70.0) (70.0) (10.6) (60.6) (71.2) (72.9)

Assumption Metrics FYE 31 Dec (RM m) 2010A Revenue Construction Property Others EBIT Margin (%) Order Book Wins

2011A

2012E 1,693.1 1,330.7 308.6 53.9 14.1 1,500.0

2013E 1,970.1 1,419.1 428.0 123.0 14.9 1,000.0

2014E 2,185.3 1,462.2 598.5 124.7 14.5 1,000.0

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Disclaimer The information contained in this report is based on data obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as such, no representation, express or implied, is made as to the accuracy, adequacy, completeness or reliability of the info or opinions in the report. Accordingly, neither Hong Leong Investment Bank Berhad nor any of its related companies and associates nor person connected to it accept any liability whatsoever for any direct, indirect or consequential losses (including loss of profits) or damages that may arise from the use or reliance on the info or opinions in this publication. Any information, opinions or recommendations contained herein are subject to change at any time without prior notice. Hong Leong Investment Bank Berhad has no obligation to update its opinion or the information in this report. Investors are advised to make their own independent evaluation of the info contained in this report and seek independent financial, legal or other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. Nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to your individual circumstances or otherwise represent a personal recommendation to you. Under no circumstances should this report be considered as an offer to sell or a solicitation of any offer to buy any securities referred to herein. Hong Leong Investment Bank Berhad and its related companies, their associates, directors, connected parties and/or employees may, from time to time, own, have positions or be materially interested in any securities mentioned herein or any securities related thereto, and may further act as market maker or have assumed underwriting commitment or deal with such securities and provide advisory, investment or other services for or do business with any companies or entities mentioned in this report. In reviewing the report, investors should be aware that any or all of the foregoing among other things, may give rise to real or potential conflict of interests. This research report is being supplied to you on a strictly confidential basis solely for your information and is made strictly on the basis that it will remain confidential. All materials presented in this report, unless specifically indicated otherwise, is under copyright to Hong Leong Investment Bank Berhad. This research report and its contents may not be reproduced, stored in a retrieval system, redistributed, transmitted or passed on, directly or indirectly, to any person or published in whole or in part, or altered in any way, for any purpose. This report may provide the addresses of, or contain hyperlinks to, websites. Hong Leong Investment Bank Berhad takes no responsibility for the content contained therein. Such addresses or hyperlinks (including addresses or hyperlinks to Hong Leong Investment Bank Berhad own website material) are provided solely for your convenience. The information and the content of the linked site do not in any way form part of this report. Accessing such website or following such link through the report or Hong Leong Investment Bank Berhad website shall be at your own risk. 1. As of 07 September 2012, Hong Leong Investment Bank Berhad has proprietary interest in the following securities covered in this report: (a) -. 2. As of 07 September 2012, the analyst, Jarod Soon Sien Ming, who prepared this report, has interest in the following securities covered in this report: (a) -.

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Equity rating definitions


BUY TRADING BUY HOLD TRADING SELL SELL NOT RATED Positive recommendation of stock under coverage. Expected absolute return of more than +10% over 12-months, with low risk of sustained downside. Positive recommendation of stock not under coverage. Expected absolute return of more than +10% over 6-months. Situational or arbitrage trading opportunity. Neutral recommendation of stock under coverage. Expected absolute return between -10% and +10% over 12-months, with low risk of sustained downside. Negative recommendation of stock not under coverage. Expected absolute return of less than -10% over 6-months. Situational or arbitrage trading opportunity. Negative recommendation of stock under coverage. High risk of negative absolute return of more than -10% over 12-months. No research coverage and report is intended purely for informational purposes.

Industry rating definitions


OVERWEIGHT NEUTRAL UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% over 12-months. The sector, based on weighted market capitalization, is expected to have absolute return between 5% and +5% over 12-months. The sector, based on weighted market capitalization, is expected to have absolute return of less than 5% over 12-months.

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