WHA Corporation

WHA Corporation Plc  

Action and recommendation 

- We came away from WHA's analyst meeting yesterday with an optimistic view of its acquisition of HERMAJ. Management provided details of the deal and its plan to repay the bridging loan, which eased our concerns about its financial status in the future. With the management guidance, we fine-tune our forecasts by 1.0% to 2.6% for the years 2014-16E. We maintain our Outperform call with a target price of Bt45.0 (Bt32.90 after the dilution from capital increase) and estimate WHA's fair value after the acquisition at Bt39.70, including Bt6.80 of incremental value from HEMRAJ. In our view, the current price has limited downside and see it providing an opportunity for long-term investors to accumulate the stock, although we acknowledge that there will be short-term pressure on WHA from its stretched cash flow, which may result in no cash dividend being paid in 2014-15. 

Key investment points 

- Divesting non-core assets to repay debt: Using WHA's view, that it will acquire 70% of HEMRAJ, as our base case, the transaction value of this deal is about Bt30.6bn,of which 29.2% will come from equity and 70.8% from a bridging loan. Under the terms of the loan, about Bt17.1bn of the borrowed sum will have to be paid back within 2 years. To do this, WHA plans to divest non-core assets owned by HEMRAJ and the sale of assets to WHART and 2 new  REITs. However, in the extreme case of a 100% acquisition, the remaining Bt4.4bn-Bt6.0bn of bridging loan would repay by the proceed from the listing of HEMRAJ's utilities & power interests or through the finding of a strategic partner, which would happen in the next 2 years. 

- Less concern about HEMRAJ's business continuity: After the transaction is completed, HEMRAJ will continue to operate its IE business as well as its utility companies within its IEs, where it has more expertise than WHA, while WHA will seek to capture related business for its built-to-suit (BTS) factories and warehouses, its area of strength. With this explicit business direction outlined and confirmation from WHA's management that key HEMRAJ personnel will continue to run HEMRAJ's business, we are less concerned about its business continuity.  

- WHA's 2014 performance. For 2014, WHA's new leased area should come in at about 180-190K sq.m., 5%-10% short of its target of 200K sq.m. Management said last year was a tough year for the warehouse-for-rent market amid high competition. Thanks to its strong customer profile, 70-80% of WHA's new contracts were for BTS warehouses at higher rental rates. Nevertheless, due to the limitations caused by the loan contract and the constraints on its gearing ratio, WHA has set a target for new leased area to grow by only 5-10%, or 200K sq.m this year. 

- Fine tune earnings in 2014-16E. To incorporate the company guidance for new contracted area, we raise our average rental rate by 6% (up from 3% growth previously) to reflect the new value of BTW, which will start to fully contribute in 2015.  In sum, we fine tune our 2014-15E earnings forecasts before the acquisition by 1% but trim our 2016E earnings by 2.6%. 

Price catalysts 

- Success of the HEMRAJ acquisition