WCT Land Bhd - 2007

WCT Land Berhad’s (“WCTL”) RM132 million Convertible Redeemable Debt Securities (“CRDS”) is affirmed at A+ (cg) with stable outlook. The rating reflects the credit support extended by its holding company, WCT Engineering Bhd (“WCTE”), which has sizeable construction order book, and improving business and financial risk profile. WCTL’s stand-alone credit quality is backed by WCTL’s competitive position as a credible property developer, underpinned by its Bandar Bukit Tinggi Township (BBT) development in Klang, and respectable profitability measures. These strengths are moderated by the cyclicality of the property market sector and the company’s continued negative free cash flow.

The bulk of WCTL’s earnings and operational cash flow is derived from its flagship development in BBT, Klang. Divided into 3 phases, BBT 1 and 2 developments have reached a mature stage with a combined gross development value (GDV) of RM2.2 billion sold as at April 2007. The presence of Tesco and Giant in BBT1 has boosted the value of the land in the area, enabling new housing launches to command higher selling prices and better profit margins. Apart from that, AEON’s presence which would be felt by the end of the year in BBT2 will likely enhance the property values and saleability of homes for its future launches not only in BBT1 and BBT2 but also in BBT3. BBT3 also known as Bandar Parklands, which initially got off to a slow start, managed to achieve a strong take up rate of approximately 90% from phases launched as at July 2007. In light of the depleting landbank in BBT 1 and 2, the group’s future earnings will increasingly be contributed by BBT3, which still has a balance GDV of approximately RM690 million.

The group’s future earnings visibility is also provided by a mixed development project and an upmarket residential development in Kelana Jaya and Sutera Harbour respectively. These projects which carry a gross development value of approximately RM1.5 billion, are expected to result in improved operating cash flow diversification in the medium and long term. MARC views the extent of geographic diversity in its landbank and accordingly, the expected higher level of cash flow diversification positively.

MARC also notes that under the issue structure, WCTL shall have the option to exercise an early redemption of the CRDS on the date 3.5 years from the issue date, which shall fall in Feb 2008. If WCTL triggers the early redemption, CRDS holders shall have the right to convert the CRDS into ordinary shares of WCTL in the manner set in the issue structure.

For fiscal year 2006, profitability measures of WCTL remained strong despite a decrease of 28% year on year in revenue due to delayed project launches arising from lackluster demand in the residential property sector. Meanwhile, operating margins recorded were at 31.41% for fiscal year 2006, relative to 27.62% and 19.30% for FY2005 and FY2004 respectively. Apart from higher progress billings from BBT1’s commercial properties, the maturity of the development has enabled the group to command higher selling prices for the development in BBT2, as positively reflected in margins for the last 3 years. The improvement in the operating margin was also aided by a reduction of 10% in operating expenses in FY2006 compared to FY2005.

Funds from operations to total debt declined to 10% as compared to 21% in the previous year due to lower operating profit and high capital expenditure commitments, which were largely debt financed. Consequently, the group posted negative free cash flow during the period under review. The trend of negative free cash flows and thin cash flow measures is expected to continue in the near to intermediate term with capital expenditure commitments remaining high approximately RM256 million.

Gearing in FY2006, as measured by the group’s debt to equity ratio rose to 0.86x compared to 0.70x for FY2005, reflective of acquisition of land and fixed assets made during the year. For FY2007, the group’s debt to equity ratio will likely weaken further to more than 1x. Nevertheless, on a net debt basis (i.e. net of cash and bank balances), the debt leverage would likely stay below 1x. Any positive rating action will depend on the group’s ability to de-leverage its gross borrowings to a more reasonable level in the short to intermediate term.

The stable outlook mirrors that of WCTE, and reflects expectations that WCTE will maintain its competitive position in the domestic construction sector and abroad while preserving its robust financial profile.