WCT Bhd - 2009

MARC has affirmed WCT Berhad’s (WCT) issue ratings as follows:

• RM300 million Redeemable Sukuk with Warrants at AA-IS
• RM300 million Islamic Commercial Papers/Medium Term Notes (CP/MTN) at MARC-1ID/AA-ID
• RM100 million Islamic Fixed Rate Serial Bonds at AA-ID
• RM100 million Islamic CP/MTN at MARC-1ID/AA-ID

The outlook on the ratings is revised to developing from negative.

The rating action reflects MARC’s decreased concerns regarding WCT’s ability to weather the setback caused by its terminated Nad-Al Sheba racecourse project, replenish its order book and restore its credit measures to levels consistent with its ratings. WCT has written back all of its profits in relation to the terminated Nad-Al Sheba racecourse project and has settled its performance security deposits of RM218.6 million. No further impact on the group’s balance sheet is expected. WCT recently secured the RM766 million Medini Iskandar project in Johor and the RM363 million first package of the new low-cost carrier terminal at Kuala Lumpur International Airport which has helped increase its order book position to RM3.4 billion. MARC believes that WCT’s improved order book position will support the group’s ability to improve its financial performance after a weaker set of results for FY2008. An improvement in WCT’s cash generation capacity coupled with the potential release of significant liquidity from retention sums for completed Middle East projects could likely mitigate in large part its heavy debt maturities in 2011. The developing outlook reflects our opinion that despite recent mitigating developments at WCT which have somewhat alleviated our earlier key credit concerns, uncertainty remains as to whether the group’s operating performance and key financial measures will improve sufficiently over the next 12 to 18 months to levels commensurate with the ratings.

The affirmed ratings reflect WCT’s established track record in the construction industry which has enabled the group to remain competitively well-positioned to replenish its order book in a more challenging operating environment and its relatively high level of available liquidity which offset to some degree our anticipation of increased pressure on margins with WCT’s increased reliance on the competitive domestic construction sector. WCT has experienced a sharp decline in its order flow from the Middle East, which prior to the current financial turbulence was a key market for WCT.

WCT has renewed its efforts to increase its domestic order book to compensate for the prospective reduction in the order flow from the Middle East. In addition to the low-cost carrier terminal project and Medini Iskandar project, WCT is undertaking in-house construction projects for its property arm, WCT Land Sdn Bhd. In-house projects include Paradigm at Kelana Jaya, a mixed commercial development project with a gross development value of RM1.4 billion. 

For the nine months ended September 2009, WCT’s revenue rose to RM3.46 billion (9MFY2008: RM2.60 billion) due to acceleration of work done on the RM4.2 billion Abu Dhabi F1 circuit, which has been completed and handed over on October 21, 2009. The increased revenue also resulted in trade receivables rising to RM2.18 billion (9MFY2008: RM1.52 billion), although this has been offset by an increase in trade payables to RM1.87 billion (9MFY2008: RM1.04 billion). In the period, WCT’s operating profit margin declined to 6.4%, due to a weaker construction profit margin which fell to 3.7% in 3QFY2009 (3QFY2008: 6.3%) as well as the deferment of new property launches during the year. Revenue and segment profit for its property division declined to RM128.3 million and RM31.6 million respectively for 9MFY2009 (9MFY2008: RM167.8 million and RM58 million).

MARC views WCT’s capitalisation to be moderate, with the debt-to-equity ratio decreasing to 0.77 times as of 9MFY2009 (9MFY2008: 0.80 times). On a net debt basis, its debt-to-equity stands at 0.28 times. WCT’s next repayment under the MARC-rated facilities is the lumpy RM334 million payment and a RM50 million collateralised loan obligation million due in FY2011. MARC understands that WCT’s available liquidity which comprises cash and bank balances of RM734.7 million in 9MFY2009 (FY2008: RM719.3 million) will be augmented by an expected release in liquidity of RM222.5 million in retention sums from its major completed projects in the Middle East, notably the Abu Dhabi F1 racecourse, the Bahrain City Centre project and the New Doha International Airport in the coming months.

The ratings would come under pressure if WCT’s credit measures remain stretched for the current ratings over an extended period. Alternatively, the outlook may be revised to stable if WCT makes meaningful progress in restoring its credit measures in the coming months.

Major Rating Factors

Strengths

Challenges/Risks