WCT Engineering Bhd - 2008

MARC has assigned initial ratings of AA-IS for WCT Engineering Berhad’s (WCT) RM300 million Redeemable Sukuk with Warrants (Sukuk) and MARC-1ID/AA-ID for its RM300 million Islamic Commercial Paper / Medium Term Notes Programme (ICP/IMTN). The outlook for the ratings is stable. Proceeds from the proposed issuances will be used for capital expenditure requirements and working capital as well as redemption of any outstanding existing bonds. The ratings reflect the strong market position of WCT’s construction and civil engineering business and its ability to sustain significant competitive challenges, as well as its consistently strong revenue and earnings performance. Additionally, strong earnings visibility is provided by WCT’s outstanding order book estimated at RM5.5 billion, which will ensure positive earnings momentum for the next two years.

WCT is principally involved in civil engineering and construction works with projects in Malaysia, Bahrain, Qatar, Abu Dhabi and Dubai. The Group is also involved in property development and property investment through its 98.87% (as at 15 February 2008) owned subsidiary, WCTL. WCTL’s flagship development is Bandar Bukit Tinggi in Klang.

WCT is a top-tier domestic construction player which has successfully established a credible track record abroad, notably in the Middle East. WCT has built a reputation for the construction of F1 circuits, having completed the Sepang F1 Circuit and the Bahrain F1 Circuit. Presently, WCT is participating in various mega projects in Bahrain, Qatar, Abu Dhabi and Dubai, including the RM2.1 billion Abu Dhabi F1 Circuit and RM4.6 billion Meydan Racecourse. WCT’s ‘hands-on’ approach to project management, the secondment of its experienced staff to various overseas projects, and its practice of identifying strong foreign partners have been key to controlling risks in overseas projects. Nevertheless, rising raw material prices and higher execution risks associated with mega projects remain key challenges for WCT.

WCT recorded strong unaudited results for FY2007 with a doubling in revenue and 77% increase in profit before tax as compared to FY2006. The strong performance was mainly attributed to a significant increase in construction activity, particularly in the Middle East. The Group’s recent and on-going corporate exercises, involving the issuance of preference shares and taking WCTL private, are expected to enlarge its equity base. In the medium term, cost savings are expected to result from planned work force and resource rationalisation.

The stable outlook reflects expectations that WCT will maintain a strong business and financial profile consistent with the ratings. Ratings stability will also depend on WCT’s ability to maintain a moderate capital structure and good financial flexibility.

Major Rating Factors

Strengths

• Credible track record and growing presence in the Middle East;
• Hands-on approach and strong foreign partners mitigate overseas project risks;
• Strong earnings visibility provided by outstanding order book; and
• Strengthened financial profile subsequent to issuance of preference shares and taking WCT Land Berhad private (WCTL).

Challenges/Risks

• Increased raw material prices heighten risk of margin erosion; and
• Execution/performance risk associated with mega projects.