WHA Corporation

WHA Corporation Plc (WHA)

 

Investment Thesis

We maintain a HOLD rating on WHA, but revise down our TP to Bt3.80 (Bt4.00 previously) on sluggish Thai industrial recovery and a discount to its valuation concerning the risk of breaching its bond covenant by YE15. We also cut our 2015 and 2Q15 NPAT estimates to Bt4,341m and Bt473m due to higher acquisition-related costs and profit setbacks. Also, there is an interest payment downside to its 2015 bottom line—if there are delays in any of its three REIT spin-offs, there will be a knock-on effect to its LBO loan repayment schedule. Should the transactions occur as planned, we believe WHA will deserve an upward valuation re-rating to above Bt4.50/share as repayment risk is mitigated.

Cut in 2015 net profit estimate

On top of the slow recovery in its core businesses, there will also be profit setbacks from consolidation of HEMRAJ’s income through to 2016. We have revised our 2Q15 net profit estimation downwards to Bt473m (including a non-core asset sale) as a result of an additional ~Bt100m FA fee, higher-than-expected interest payments and lower profit recognition from HEMRAJ operations as its assets are recorded at fair value on the acquisition date. As such, we have also revised down our 2015 and 2016 NPAT forecasts to Bt4,341m and Bt6,194m.

Delay to asset divestment may breach debt covenant

As WHA will be providing a rental guarantee for the 70%-occupied SJ Infinite One building when divesting the asset to its office REIT (WHABT) in 3Q15, this obligation implies that the asset will not be transferred out of WHA’s books. Also, HEMRAJ’s RBWs and RBFs will be sold to its brand-new H-REIT on a 60-year financial lease in 4Q15, longer than the standard 30-year lease. Such complicated transactions may delay the IPO of its REITs and consequently, force a late loan repayment schedule. This bears the risk of WHA failing to reduce its D/E below the bond covenant of 2.5x by YE15. 

New businesses not yet realizable

We believe that WHA’s new businesses are as yet unrealizable this year. Though there is high potential for the firm’s built-to-suit factories, we feel that inquiries are yet to be converted to revenue. Its low-cost “fighting-brand” warehouses are also unlikely to bear fruit this year, as its first small project is still under construction. On the data center front, we believe that it will be at least by 1H16 before we see any mandate from the government for the 40-odd data center projects.

Power income to support bottom line, but no growth until 4Q16

Despite HEMRAJ’s power business providing a solid recurring income, there are no income growth catalysts in the near future. Its next SPP commission date is in November 2016 and although HEMRAJ will be looking to participate in municipal waste power projects in the coming months, its income contribution will be insignificant to its current power portfolio and construction will also take time. We estimate the earliest commissioning date to be in 2H16 at the very least.