WHA Corporation

WHA Corporation Plc (WHA) 

 

Investment Thesis

WHA’s share sell-off during the recent downturn has left the stock oversold. We believe investors are overly concerned about its leveraged buyout (LBO)—but as the deleveraging plan is panning out, the strategy seems readily achievable. As a result, its bottom line is about to soar at a CAGR of 202% during 2015-17. Coupled with an all-time low valuation; we upgrade our rating to BUY. Our conservatively derived 2016 target price of Bt4 only accounts for HEMRAJ’s extra net profit contribution and interest savings from the degearing process, while also pegged to a safe PER of12.4x. WHA is now trading at its cheapest-ever PER of 9.8x—more than 1SD below the sector’s long-term PER of 14.0x and also below HEMRAJ’s long-term PER of 16.0x.

Debt covenant is not a concern …

With the IPO date for the WHA Business Complex Freehold and Leasehold REIT (WHABT) approved for the end of October, the only perceived risk to its degearing plan is the ~Bt7.8bn in proceeds from the HREIT. However, WHA should be able to meet its bond covenant of 2.5x gearing by YE15 even if the IPO is delayed. HEMRAJ’s Bt2.7bn cash in hand, the WHA-W2 warrant exercise proceeds, along with the firm’s 2015 net income, will be sufficient to lower WHA’s gearing to 2.3x from intercompany lending and higher retained earnings. 

… while exceptional profit growth to 2017 remains intact

We expect the warehouse developer’s core net profit to surge almost 200% and 72% YoY for 2015 and 2016 respectively as the firm decreases its LBO interest payment and starts to realize HEMRAJ’s full-year profit contribution. Core net profit is also expected to grow 61% in 2017 as its operations start to pick up pace. This would be equivalent to a massive 202% net earnings CAGR during 2015-17.

New business opportunities—next scope for earnings upside

Even though all state enterprise data center projects may be delayed past the previous October 2015 mandate after the new cabinet reshuffle, the project remains a priority on the cabinet’s agenda. However, because the scope for WHA is yet to be fleshed out, we have excluded this opportunity from our model. Likewise for the case of its renewables business, which remains an upside to our earnings forecast. The core net profit forecast in the current model only accounts for existing business consolidation and interest savings as WHA degears over the next two years.

What’s in the price?

We believe WHA’s current share price is undeniably cheap. Our current target price of Bt4 already accounts for the 18% EPS dilution from both WHA-W1 (1,314m new shares’ exercise price Bt3.5) and WHA-W2 (1,168m new shares exercise price Bt2.7). Also, a certain margin of safety has been taken into consideration for our target price; our 2016 EPS is only pegged to a PER of 12.4x, 1.7SD below WHA’s long-term PER and also 0.5SD below the sector’s long-term average PER.