Saturday, February 11, 2017

WCE: Raising funds at the right price

Having idled for more than 2 years, WCE has just experienced a good climb from RM0.90 beginning of the year to RM1.27 in just over a period of 40 days as it is possibly getting ready to raise further funding. We know that to complete the expressway and due to the condition from its funding, it will need to make up its equity portion to RM1.2 billion. Since WCE Holding owns 80% of West Coast Expressway, that comes to it needing RM960 million.

From its earlier funding, profit from construction and properties (Rimbayu) and sale of several assets, it probably has managed to gather around RM700 million. If that is the case, WCE will still need around RM200 - RM250 million depending on the performance of the company over the next 2 years.

The biggest question is how it is going to do the fund raising and at what price. Looking back at what WCE had done over the last 6 years in its preparation for the project, it has done 3 rounds of fund raising. The first one a private placement pricing its shares at RM1.22 back in 2011 (see below).


Ironically, when the project was confirmed, it did another round of private placement - this time at a price of RM1.11 in 2013 (see below).


Then, one year after that it did a rights issue pricing the stocks at RM1.08 in 2014. (One could argue that it was a rights issue and every shareholder has the right to participate)


What is ironic from above is that the closer it has gotten to the fruition of the project, the price it did its fund raising just went lower and lower.

Now that it is possibly doing another round in the near term, question is will it wrongly price its new shares offering, hence diluting further the current shareholders unfairly? One should note that one of its major shareholders, MWE bought a 22% chunk from Tan Sri Chan Ah Chye at RM1.35.

Because of the continuous under-pricing of its transactions, it would be really weird if another round of funding is done at below RM1.35 - wouldn't it be? And this is yet to take into account that the project is getting closer to completion (2 years time) and the holding costs of all those people whom have been subscribing to the earlier issuance.

Who seriously in their right mind, among the current set of major shareholders would agree to a low pricing?

11 comments:

reyes430 said...

Hi Felicity,

Sorry to ask some stupid questions.

1. What you mean by this article is since that WCE is getting their project closer to completion, it will be better for them to issue new shares in higher price than what they did before, so that it will be fairer to the previous subscriber? The logic behind is because the project certainly worth more now than before? However, since that private placement is somehow based on VWAP then isn't it will be just fair as it is?

2. The recent price hike on WCE might be the reason for another round of fund raising?

Thanks.

felicity said...

Hi Reyes430

1. Definitely, if the company is to raise the new funding at higher price, it will be more beneficial to the current shareholders. Assuming they need RM200 million - if they go about and raise at RM1.50 then the total shares to be issued is at 133 million shares. If however the company raises new funding at RM1.00, then they will need to issue 200 million new shares. The more shares the worse off for current shareholders. This is because one will be less diluted.

2. The recent hike, I would not say is because of the another round of funding as I do not know for sure. However, it was definitely way underpriced for a long time as my article was trying to highlight.

reyes430 said...

Dear Felicity,

I have read most of your post in regarding to WCE and ekovest since i am interested to invest in toll operator business too. However, what are your major concern/risk by investing in such business as it usually take many years from construction to break even and eventually earn money. Moreover, due to the huge cost involved and hence the huge debts,isn't it a concern too especially when financial crisis happened. (cost of raw materials, labour increased). Just my assumptions as i am keen to learn more about the business. Thanks and hope to listen to your insights

felicity said...

Hi Reyes

You can see that Ekovest's DUKE already makes accounting profit and positive cashflow. The positive cashflow is most important in the beginning of a highway. For any investment, one has to be comfortable. For a highway, it has to be from a good start to allow the operators to make money. There are highways that do not make money from the early days. These are SILK, 2nd link to Singapore, Seremban - Port Dickson, Kulim - Butterworth, LATAR, AKLEH and few more. The ones that makes money there are more.
For WCE, they are already midway through the construction and most of the costs are already accounted for. At the moment, as it is in between many big projects e.g. MRT1 and MRT2, they are in a sweet spot to make sure the costs does not exceed budget.
Still, no doubt there are challenges.
When I picked WCE, I know that there are some margin of safety, the Rimbayu as one. Taken out Rimbayu, the highway is basically almost free in the valuation. Hence, I am looking at huge upside and lower downside.
In any investment, probability is very important. I would think the biggest downside is time - have been holding for 3 years at RM1 costs and only recently see movement. There are opportunity costs. I actually see some who bought and have lost confidence as well as patience.
Investment is a patience game too as long as we are confident with what we do.
I can tell you, I actually did a lot of homework on this counter.

panaceaasia said...

Felicity,

Thank you for your insights.

My observation of companies in Asia is that the business is as good as the people who manage it. WCE is controlled and managed by IJM.

IJM in my humble opinion is one of the best managed construction groups in SE Asia.

felicity said...

IJM being one of the best construction and management company is also one of the factor. Anything we invest - for the long term - the management must be above average.

reyes430 said...

Hi Felicity,

Again i read through your post on WCE (in fact i read more than once for most of the post which i am interested), and i have a question for below:

"Calculation on Rimbayu
Total acre - 1878 acre
Total sq ft - 1878 x 43,560 = 81,805,680 sq ft
Discount - 20% for an associate stake
Price per sq ft - RM35 per sq ft
Total Value - 81,805,680 x 80% x RM35 x 40% = RM916,223,616"


I extracted it from one of your article written long long time ago. I fully understand about the calculation, but not on how to get the figures for total acre as well as the total value? My knowledge told me that the balance sheet shall reflect the company asset but i cannot see any. Property, plant and equipment is only 10m which is far less than the exact value even without revaluation? Isn't it a company must report its asset value in carrying amount? Hope to get your clarification thanks a million.
Sorry for so much questions as i am trying to learn.

felicity said...

HI Reyes

WCE owns 40% of Rimbayu. In this case it is an associate stake which means it will be equity accounted. DO check on what it means by equity accounting as it is quite long. The most important answer to equity accounting for your question is that the assets and liabilities of Rimbayu will not be reflected in the Balance Sheet. For comparison, West Coast Expressway will be reflected.

Hence, you cannot see RImbayu in the Balance Sheet but the profit sharing will be accounted for.

reyes430 said...

Dear Felicity

Will it be reflected under "investment in associates" in annual report? I take a look on WCE annual report and it appears that current asset is so much higher than non-current asset. I am kind of lost. haha
Thanks

panaceaasia said...

Felicity,

The managements of the businesses we invest in must be of the highest level.

A level or two above average is not comforting.

felicity said...

Hi Reyes,

It will be reflected in the Annual Report, but you will not be able to see the assets and liabilities.