WCE - an leveraged asset play??

Once a while, I would take a look at WCE’s financial as well as share price performance. The share price has gone up from around Rm0.90 to Rm1.70 and its back to Rm1.28 lately.

Quick overview of WCE Holdings Bhd’s valuable assets:-

 
To make it simpler, let’s just focus on West Coast Expressway and ignore the 30% contribution from JV with IJM as the margin is very thin and keep the 40% profit from Bandar Rimbayu development as bonus. The expressway is still under construction and some sections will be opened for toll collection only by end 2018 and expected to be fully completed by 2019. I have not seen any comprehensive valuation done by analyst as I believe it is not an easy task considering it is going to be a new expressway competing with PLUS for traffics travelling between Perak and Selangor.

What is so exciting about WCE that it gets so much attention every now and then? I do not think there are many long term investors out there (willing to hold at least 5 years), so what are the short term investors/speculators after? I try to figure out the possible reasons.

1. Profit expectation from toll operation? – not likely as I expect loss or low profit in the initial years of operation– the amortisation/depreciation of Construction/Toll Concession cost (say over 50 years will be Rm120 mil a year) and its finance cost (average interest rate worked out to approximately 6.5% will be Rm300 mil a year), that is Rm420 mil before any operating cost. Let’s take a look at a news update on PLUS financials here if that is an good indication.  
2. Dividend play? – only in the very long term. If there is no profit, no dividend from WCE S/B even though cashflow could be very good. WCE Holdings Bhd may be able to give some from Rimbayu project??
3. It is a prime asset that worth a lot more than the construction cost when completed, hence re-rated with much higher valuation. Yes, I would imagine this is the likely reason.

Total cost of construction approximately Rm5.94 bil - Loan is Rm4.74 bil and balance Rm1.2 bil in equity. Frankly, I don’t know how to value it but what I can see is the expected return on equity can be very attractive due to its high leverage (5 x) if market is willing to give a much higher value to a completed infrastructure.
Let’s take a look what are the potential return ( taking a bull view with assumption that it will not be valued below the total construction cost and WCE Holding has 80% stake in WCE S/B)

WCE S/B			RM' billion		WCE Holdings Bhd		RM' billion
		Cost/ Value	Loan	Equity	80% Equity	Current Market Cap	*Expected Rights Issue	Enlarged Market Cap	Potential Return in 2 years
Cost of construction		5.94	4.74	1.2	0.96	1.28	0.256	1.536
On completion, value increase by
20%		7.128	4.74	2.388	1.910				24%
30%		7.722	4.74	2.982	2.386				55%
40%		8.316	4.74	3.576	2.861				86%
50%		8.91	4.74	4.17	3.336				117%
100%		11.88	4.74	7.14	5.712				272%

 *My rights issue assumption is based on the proceeds expected from the planned warrant exercise, which was expired last year and did not manage to raise any fund (thing doesn’t go according to plan sometimes).

However, there may be long gestation period before one can get the return expected. In addition, there is a short term dilemma, if you buy now, you must be prepared to subscribe for its right issues that will come sooner or later as WCE S/B needs to fulfil the debt-equity ratio of not more than 80/20. Hence, WCE Holdings Bhd needs to inject further capital into WCE S/B.
Yes, it’s potentially a very rewarding investment if one believes the Expressway could worth at least 40% more on completion but be prepared for a long winter before spring arrives. As usual, I guess many would rather wait till it gets closer to the completion date only go in for a quick kill.

Some wild thought on the long Merdeka break!