WCT Bhd - 2010

MARC has assigned a rating of AA- to WCT Berhad’s (WCT) RM600 million serial fixed rate bonds with 193.7 million detachable warrants. The outlook for the rating is stable. The proceeds from the issue will be used to fund the repayment of its upcoming debt maturities totalling RM350 million in FY2011 and FY2012 as well as working capital requirements of the group. The assigned rating incorporates the improved outlook for WCT’s operating environment as evidenced by a pickup in the pace of its order book replenishment in the second half of 2010. The expected growth in domestic infrastructure spending and WCT’s current order book position support better earnings visibility going into 2011. The rating also reflects the group’s relatively strong position in the domestic construction sector and its track record for execution as well as improving diversity of activity across construction, property development and property investment, notwithstanding the cyclicality of these sectors. WCT’s financial profile has also benefited from a widening of its operating margins and its strong liquidity position. Constraining the rating is WCT’s material exposure to the domestic construction and property development sectors and the execution risks posed by its large-scale property development in Vietnam.

MARC observes that with the proceeds of the bond issue, WCT has sufficient liquidity to meet the debt maturities of RM330 million due between March and August 2011. A reduction in WCT’s working capital following lower construction volumes has allowed WCT to maintain a strong liquidity position with cash and bank balances standing at RM618.2 million as at September 30, 2010 (9MFY2010). WCT’s construction order book of RM3.89 billion as of end-October 2010 provides revenue and earnings certainty for the next 12 to 18 months. WCT has replenished its order book with RM2.0 billion of new projects, including the KLIA2 Integrated Complex and a RM1.36 billion government administration building in Qatar, reversing an earlier declining trend in its outstanding order book volumes. Nonetheless, MARC notes that WCT’s current order book size remains considerably lower than the RM5.54 billion as at end-FY2007.
 
WCT’s construction earnings for the first nine months of the year has declined while contribution from property development has risen to about 29.3% of profit before tax from 14.3% in the corresponding period last year. New project launches in 2011, which notably include the RM700 million 1Medini Residences project in Iskandar, Johor and ongoing projects at its Bandar Bukit Tinggi (BBT) Township flagship development in Klang, Selangor, provide support for increasing property development earnings.

WCT is also augmenting its earnings with stable rental income by developing and owning shopping malls. By November 2011, WCT’s shopping mall component of its RM1.35 billion Paradigm development in Kelana Jaya, Selangor will be completed. The mall, which has a nett lettable area of 680,000 sq ft, is the first of three components of the project, which include office towers and office suite units.  WCT also developed and owns Aeon Mall in Bandar Bukit Tinggi, which provides the group with steady recurring rental income of about RM30 million annually.

WCT’s foray into Vietnam will be marked by a larger scale version of its Paradigm project, the RM2.2 billion Platinum Plaza development in Ho Chi Minh City, Vietnam. Located on a 22.2-acre site, the project will also comprise a four-star hotel component in addition to a shopping mall and office towers. The development is being undertaken on a joint-venture basis with a local Vietnamese construction company. Notwithstanding Vietnam’s recent economic growth that has spurred strong demand for commercial and residential space in Ho Chi Minh City, MARC is concerned that its projects in the country may pose cross-border execution risks given that much of the property-related issues, including the regulatory framework in the country, are in the nascent stage. The higher operating environment risks associated with Vietnam’s emerging market economy could eventually exert pressure on WCT’s credit profile should WCT’s Vietnam operations contribute a significant proportion of its total revenue at a later stage.
 
For 9MFY2010, revenue declined significantly to RM1,270.8 million from RM3,459.0 million from the corresponding period ended September 30, 2009 (9MFY2009), reflecting lower construction volumes following the completion of several significant projects such as the Yas Marina F1 racecourse in 2009. The significant decrease in revenue from the construction segment has been partly compensated by its property development business which registered an increase in revenue and operating profit amounting to RM184.5 million and RM58.0 million respectively (9MFY2009: RM128.3 million; RM31.6 million) due to higher contributions from its Bandar Bukit Tinggi 1, Bandar Bukit Tinggi 3 and d’Banyan Residency developments.

WCT’s operating margin showed an improvement of 15.6% in the current period (9MFY2009: 6.4%) which was driven by an increase in gross profit margins to 17.4% (9MFY2009: 7.8%), attributable to its property development segment as well as a revaluation gain of RM10 million on investment properties. For 9MFY2010, the slight increase in WCT’s debt-to-equity ratio to 0.73 times (FY2009: 0.67 times) was largely due to the compounding effect of an increase in total debt and a reduction in shareholders’ equity with the adoption of FRS139 and dividend payment.

The stable outlook reflects MARC’s opinion that WCT’s financial performance will continue to recover in 2011 given the improved outlook for the domestic construction sector. Providing added financial flexibility in the event of a slowdown in construction activity will be WCT’s extended debt maturity profile following the refinancing of its 2011 debt maturities.

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