This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

The slowdown in the real estate market does not seem to have deterred property-related companies from buying more land. This could be due to the belief that as land is scarce, they should move fast if an opportunity arises.

Last week alone, two companies, namely WCT Holdings Bhd and IOI Properties Group Bhd, announced proposed land acquisitions.

Both are not cash deals.

WCT is buying a small parcel right in the city centre, in Tun Razak Exchange, for RM223 million, while IOI Prop is acquiring 400 acres in Sepang from its controlling shareholders for RM2.03 billion. 

The way WCT (fundamental:0.45, valuation:1.40) and the vendor, 1MDB Real Estate Sdn Bhd, have structured the land deal is unique. WCT was awarded a RM754.8 million contract to build infrastructure in TRX, and part of the payment for the construction work will be used to offset the land purchase. In short, WCT is getting a TRX job and buying TRX land.

WCT’s share price has been volatile since it announced the infrastructure job and land purchase on Oct 19, hovering within a 2% band. It jumped 3.65% on the day the deal was announced, but declined 2.1% the next day. 

Over at IOI Prop, its share price rose 7.1% to end the week at RM2.29 — its highest level this year. 

In general, WCT’s deals are viewed positively, but “anything that has to do with 1MDB brings a negative connotation. The market does not seem to like it that WCT is involved in the development of TRX. Some even think the price is expensive”, says an analyst.

To recap, the contract sum, amounting to RM754.8 million, is to be paid over three milestone payments based on the work done at TRX. The job starts on Oct 21 and is to be completed no later than 687 calendar days from the commencement date.

At the same time, WCT entered into a sale and purchase agreement (SPA) with KLIFD Sdn Bhd, a wholly-owned subsidiary of 1MDB Real Estate.

WCT’s purchase of a 1.65-acre plot of development land within TRX for RM223 million translates into RM3,098 per sq ft, which is lower than the RM4,683 psf paid by Affin Bank Bhd for 1.25 acres in TRX in August, but higher than the RM2,736 psf paid by pilgrim fund Lembaga Tabung Haji for 1.58 acres in May.

WCT plans to build high-end serviced apartments on the land with an estimated gross development value of RM1.1 billion. The land comes with an allowable plot ratio of 10.8 times with a maximum permissible gross floor area (GFA) of 755,002 sq ft.

Maybank Investment Bank’s Chai Li Shin forecasts a net profit contribution of RM45.9 million, or 3.7 sen per share, from the construction contract by 2017.

Tan Siang Hing, an analyst with Public Investment Bank, says while the price paid on a GFA basis of RM288 seems fair, given the current market conditions, the project WCT is planning might take a while to monetise.

However, there are concerns that WCT’s gearing will increase and the cash flow from the construction contract might not be enough to reduce debts significantly. WCT will just receive 70% of the contract value, as the other 30% will be set off against the price of the land.

The group’s net gearing was 0.8 times as at June 30. WCT had RM594.3 million in cash balances during the period against total debts of RM2.45 billion.

WCT is expecting a RM1.2 billion award from the arbitration case it won in July against Meydan Group LLC of Dubai for the termination of the Nad al Sheba Racecourse project. But analysts do not expect the group to receive the sum soon. 

Investors also do not seem to be convinced about WCT’s expectation of getting the arbitration award.

“WCT expects to receive the award payment within three years, but payment from arbitration cases is hardly predictable. Its share price performance seems to show that investors have not yet factored in the RM1.2 billion award,” says an analyst.

For IOI Prop, the related-party transaction seems to have gone down well with the investing fraternity as some quarters believe the purchase of more land in Sepang would improves IOI Resort City’s earnings prospect as it would complement the existing development. 

More importantly, the transaction price is considered fair. 

The acquisition will enlarge the development to 449.7 acres, with an estimated GDV of RM20 billion.

IOI Prop (fundamental: 1.95 , valuation: 1.80) agreed to acquire Mayang Development Sdn Bhd from Tan Sri Lee Shin Cheng and Puan Seri Hoong May Kuan, and Nusa Properties Sdn Bhd from them and Datuk Lee Yeow Chor for a total consideration of RM2.03 billion.

Only 10% of the total consideration will be paid via cash, with the remainder to be settled via the issuance of new IOI Prop shares to the vendors. The acquisition price translates into RM117 psf, compared with the range of RM120 to RM150 psf in Putrajaya and Cyberjaya, according to Jason Tan, an analyst with Hong Leong Investment Bank.

However, analysts do not expect massive shareholding dilution. Upon the completion of the deal, Lee’s shareholding would increase to 58.56% through the issue of shares. Thus, this would not affect the property group’s gearing ratio, which would inch up to 0.1 times from 0.07 times. 

“Balance sheet remains solid with net gearing only expected to increase slightly from 0.07 times to 0.1 times, providing room for future land bank acquisition. We estimate the acquisition to increase RNAV by 17%, offsetting the 17% dilution in enlarged share base,” Tan states in his report.

“We believe this is a synergistic acquisition as it will expand IOI Prop’s landbank in IOI Resort City from the existing 50 acres to 450 acres and complement the existing development. In addition, this also provides an opportunity for IOI Prop to embark on the second phase of IOI City Mall,” says Tan.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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