Enhancing the value of WCT Engineering

PETALING JAYA: WCT Engineering Bhd (WCTE) has jumped onto the privatisation bandwagon in Malaysia.

The construction group made a RM503.5mil voluntary takeover offer, via an issue of new shares, to privatise its 64.8%-owned property unit, WCT Land Bhd (WCTL), at RM2.09 per share.

“It will be a significant enhancement for the group if we merge the two companies together. It is a value-enhancing deal for WCT Land,” executive director Loh Siew Choh told StarBiz yesterday.

WCT Engineering's RM102mil Al-Seef flyover in Bahrain, completed in 2005

Loh said it was difficult to move as a group when WCTL was a listed entity that was required to be run by separate management team, and there were rules and regulations to observe.

Making WCTL a wholly-owned subsidiary would help clear these obstacles, thus enabling the property arm to follow in WCTE's footsteps abroad.

“Our plan is to bring WCT Land to all the places where the parent company is already established,” Loh added.

WCTE has built a strong footing in the Middle East over the past years.

Its solid track record has won the group several mega jobs, such as the RM4.6bil racecourse in Dubai and the RM2.1bil Formula One circuit in Abu Dhabi. WCTE has 50% stakes in the two projects.

Under the proposed exercise, WCTL shareholders would receive 524 WCTE shares (to be issued at RM3.985 each) for every 1,000 shares held in the property company.

An aerial view of the Bahrain International F1 Circuit

WCTE also proposed to acquire all the outstanding five-year 3% convertible redeemable registered debt securities that have nominal value of up to a total of RM61.25mil in WCTL not owned by it.

The acquisition of the debt securities will be settled by issue of shares on the basis of about 1.049 shares for every RM1 nominal value of the debts.

Last month, WCTE announced a share-split exercise to divide its RM1 shares into two new 50 sen shares. Thus, all the share consideration related to the privatisation will be issued after the share split.

“We thought long and hard about it (the structure of the deal). We looked at the share and cash option,” said Loh.

The group decided on the share-swap settlement because it would enable WCTL shareholders to migrate to the holding company.

“WCT Land shareholders would have the opportunity to participate in WCTE, which is bigger and more liquid. This will offer them the chance to enjoy the growth in WCTE,” Loh said.

WCTE's share base will balloon to at least 889 million up to one billion from the existing 321.4 million upon completion of the share-split and privatisation exercises.

Loh said there would not be earnings dilution in WCTE after the new shares issue.

The increase in earnings contributions from WCTL as a wholly-owned subsidiary would be able to offset the impact on the enlarged share base, he added. WCTL currently generates about 20% of the group's total net profit.

For the nine months ended Sept 30, the property firm posted higher net profit of RM45.2mil versus RM31.7mil in the previous corresponding period. Revenue rose 17% to RM209.3mil from RM177.9mil previously.

According to executive director Chua Siow Leng, who spearheads the group's venture in the Middle East, WCTE had achieved an annual compounded growth rate of 20% to 30% over the years.

Chua said the group was striving to maintain the growth momentum in future.

In the third-quarter financial result announcement to Bursa Malaysia, WCTE said with its RM6.1bil order book, it was “confident of a better financial performance in the remaining of the year.”

For the nine months ended Sept 30, the group's revenue had more than doubled to RM1.95bil compared with RM784.6mil in the previous corresponding period. Its net profit expanded 67% to RM99.9mil from RM59.8mil previously.

WCTE's revenue surged above the RM1bil mark for the first time in the last financial year ended Dec 31, 2006 (FY06). Its turnover rose to RM1.4bil and net profit increased to RM115.2mil from FY05. The group derives 60% of its revenue from abroad.

Besides the works in the Persian Gulf, WCTE holds three toll road concessions in India.

The concession period for the two toll roads in West Bengal, in which WCTE has 30% stake each, stretches until 2020, while the toll collection in Andhra Pradesh, in which the group holds 21.6% stake, lasts until 2032.

Analysts concurred that the share-swap deal offered WCTL's minority shareholders a chance to participate in a bigger company and to ride on the group's growth potential, which could be good based on its past achievements.

“The intention to take WCTL private is indeed a vote of confidence on the property developer's prospects,” said an analyst.

“Although there isn't a windfall at the offer price of RM2.09 versus its last traded price of RM2.01, the deal allows you to hold shares in WCTE.”

Analysts viewed WCTE as a first-tier construction group, and no longer as a sub-contractor.

Some analysts reckoned that when WCTL came under the same management as the holding company, it might be better able to seize opportunities abroad.

As for WCTE, analysts said the privatisation would help prevent earnings leakages.

By The Star (by KATHY FONG and LAALITHA HUNT)