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MARC has affirmed its AA-IS, MARC-1ID / AA-ID, AA-ID and MARC-1ID / AA-ID ratings on WCT’s RM300 million Redeemable Sukuk with Warrants, RM300 million Islamic Commercial Papers / Medium Term Notes, RM100 million Islamic Fixed Rate Serial Bonds and RM100 million Islamic Commercial Papers / Medium Term Notes Programmes respectively. At the same time, all ratings were removed from MARCWatch, where they were placed on January 9, 2009.
The negative rating outlook reflects increasing downward pressure on the company's ratings, resulting from a weaker financial performance for financial year ended December 31, 2008 (FY2008) and deterioration in its debt protection measures. The rating outlook also incorporates its unresolved dispute with Meydan LLC over the cancelled Nad Al-Sheba Racecourse project. Since MARC's last rating action on WCT on January 9, 2009, the construction consortium, WCT and Arabtec Construction LLC (Arabtec) have commenced arbitration against Meydan LLC over the cancelled project and have filed claims totalling AED1.69 billion including amounts due under the contract and damages for breach of contract. The dispute is being arbitrated through the Dubai International Arbitration Centre.
The affirmed ratings, meanwhile, reflect MARC's expectation that the dispute over the cancelled contract will not have further major negative effect on the construction company's credit quality in the immediate term. WCT has reversed all previously recognised profits in prior quarters on the racecourse project, culminating in a fourth quarter loss of RM44.5 million in FY2008. In addition, MARC understands that liquidation of the construction consortium's performance bond by Meydan LLC has not occurred. The decision of the Dubai Courts to freeze such action until resolution of the legal proceedings will prevent the project owner from cashing in the performance bonds in the interim. The construction consortium's exposure to losses on the cancelled project is also mitigated somewhat by performance bonds put up by its sub-contractors.
For FY2008, WCT reported a full-year unaudited profit of RM158.8 million, a 44.0% decline from the previous financial year. Its cashflow measures and gearing have also been tested in recent months, on account of increased working capital needs, in particular those stemming from its Nad Al-Sheba Racecourse and Abu Dhabi F1 projects. Cash flow from operations turned negative with a deficit of RM65.1 million while its debt to equity ratio rose to 0.83 times, compared to 0.81 times at year-end 2007. WCT's credit measures, which are currently weak for its rating category, should see some improvement with the scheduled completion of its largest outstanding project, the Abu Dhabi FI circuit by end-August 2009. Its working capital needs for other projects are expected to remain generally in line with internally generated cashflows.
WCT's current RM3.39 billion order book provides sufficient near-term earnings visibility. Notwithstanding, profitability is likely to remain pressured over the near to medium term as a result of the more challenging business environment in WCT's key markets. Its liquidity position, however, remains sound with cash and cash equivalents of RM745.8 million. This, and WCT's manageable debt maturity profile should allow it to exhibit moderate resilience to higher volatility in profitability and cashflow as seen in recent periods. The ratings will continue to be driven by its ability to restore profitability and cash flow generation.
Major Rating Factors Strengths Strong earnings visibility backed by current order book of RM3.39 billion; Hands-on management and strong foreign partners; and Track record of managing fast-track projects.
Challenges/Risks Margin erosions from further provisions in respect of Meydan Contract; Replenishment of lumpy order book; and Timely and favourable resolution of the Meydan arbitration case.
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