WCT Holdings Bhd - 2014

MARC has affirmed the long-term and short-term ratings on investment holding company WCT Holdings Berhad’s (WCT Holdings) existing debt and sukuk issuances as follows:

• RM100 million 7-year Islamic Commercial Paper/Medium-Term Notes (ICP/IMTN) at MARC-1ID /AA-ID;
• RM300 million 7-year ICP/IMTN at MARC-1ID /AA-ID;
• RM600 million 5-year Fixed Rate Serial Bonds at AA-; and
• RM1.0 billion 15-year MTN Programme at AA-.

The affirmed ratings carry a stable outlook. The ratings are underpinned by WCT Holdings group’s business profile as a major domestic construction group with a demonstrated track record and operational scale that have enabled the group to maintain a competitive position in the industry. The ratings also consider the group’s steadily increasing involvement in property-related activities that has reduced overall earnings volatility and its improved liquidity position that has benefited from an alignment of its debt maturity profile. Moderating the ratings are WCT Holdings group’s susceptibility to the cyclicality of the construction and property industries, its exposure to geographical and project concentration risks as well as its thin construction margins that could come under further pressure from cost escalations.

Following the recent completion of a group-wide restructuring exercise, WCT Holdings was formed as an investment holding company of WCT Berhad (WCT), its construction subsidiary, and WCT Land Sdn Bhd (WCT Land), its property subsidiary. Under the restructure, the rated facilities which had been issued by WCT were novated to WCT Holdings. The internal reorganisation exercise has had no rating impact on the rated facilities. MARC notes that the contribution to group operating profits excluding fair value gains of RM251.6 million from the construction and property segments stood at 51.4% and 48.6% respectively for financial year ended December 31, 2013 (FY2013) (FY2012: 42.8%; 57.2%). The performance of the construction subsidiary benefited from the sharp upturn in the domestic construction sector. In FY2013, WCT secured RM670.0 million in new projects, bringing the total construction order book outstanding to RM3.4 billion (FY2012: RM2.9 billion).

While MARC believes that WCT’s outstanding construction order book will provide near-term earnings visibility, the rating agency notes with concern that 38.8% or RM1.3 billion of the construction order book are internal construction projects (FY2012: 19.0%, or RM547.0 million), which poses concentration risk. In addition, given that the group’s internal construction works will also include property development activities on its land bank, which stood at about 829 acres as at end-December 2013, the prevailing moderating trend in the property sector could pose downside risks to its earnings growth. The recent imposition of tighter measures on the property sector has had a negative impact on WCT Holding’s property arm.    

For FY2013, the property development segment recorded lower revenue and operating profit of RM425.1 million and RM93.6 million respectively from the previous year (FY2012: RM463.0 million, RM117.5 million) due in part to sluggish sales. Newly launched projects with total gross development value (GDV) of about RM638.0 million registered an average take-up rate of only 52.0%. Nonetheless, unbilled sales of RM575.0 million as at end-December 2013 provide support to near-term profitability. Following protracted delays to commence construction of Platinum Plaza in Ho Chi Minh City, Vietnam, WCT Land ceased to proceed with the development of the project in February 2014, resulting in a write-off of about RM9.0 million. MARC observes that this cancellation of a foreign project is the second one in recent years after the cancellation of the RM1.0 billion construction contract for the Batinah Expressway in Oman in April 2013, underscoring WCT Holdings’ heavy reliance on domestic contracts and projects for its performance in the near term.  

The group’s property investment rentals from its mall in Bandar Bukit Tinggi, Klang, and hotel management fees provide steady income streams (FY2013: RM61.5 million; FY2012: RM85.0 million). The year-on-year income decline was the result of a 30% divestment in wholly-owned subsidiary Jelas Puri Sdn Bhd, which owns the Paradigm development in Kelana Jaya (including the Paradigm mall, office-cum-residential towers and hotel) for RM87.5 million. Nonetheless, MARC expects earnings from the property investment segment to normalise when WCT Holdings’ airport mall, gateway@KLIA2 at the new low-cost carrier terminal (LCCT), comes onstream. The mall, which has registered approximately 80% occupancy of net lettable area (NLA) of 370,000 sq ft as at end-December 2013, is expected to open on May 2, 2014. WCT Land is expected to add two more investment properties, Paradigm Mall, Johor (NLA: 1.2 million sq ft) and Paradigm Mall, OUG in KL (NLA: 1.5 million sq ft), by 2016 and 2018 respectively.

For FY2013, consolidated revenue rose 6.1% y-o-y to RM1.65 billion (FY2012: RM1.56 billion) largely on account of completion and delivery of major projects, including the civil works for Vale Malaysia Minerals Sdn Bhd in Perak and earthworks for KLIA2 in Sepang. The group’s pre-tax profit, excluding valuation gains (FY2013: RM51.1 million; FY2012: RM210.9 million), declined marginally by 0.4% to RM203.1 million compared to RM204.0 million in the previous year. MARC observes the group’s borrowings have increased to RM1.9 billion as at end-FY2013 (FY2012: RM1.8 billion), although the consolidated gearing ratio stood at a lower 0.85 times (FY2012: 0.98 times) due mainly to an increase in shareholders’ funds following the exercise of share options and conversion of warrants.  However, on a net debt basis, the gearing ratio is about 0.42 times (FY2012: 0.40 times).

MARC notes with concern that the group’s cash flow from operations (CFO) has declined sharply to negative RM508.6 million mainly due to the acquisition of land in Overseas United Garden (OUG) for RM450 million and an abandoned shopping mall in Johor for RM180 million. As a result, the group’s free cash flow has widened to negative RM778.5 million (FY2012: negative RM83.8 million). At the holding company level, revenue, which mainly consists of dividend income, was RM412.8 million in FY2013. MARC notes that the company-level cash balance of RM472.6 million as at end-December 2013 is deemed sufficient to meet its debt repayments of RM300 million in 2014, of which RM100 million was paid in early January while RM200 million is due in June 2014.

The stable rating outlook incorporates MARC’s expectations that WCT Holdings’ credit metrics will remain commensurate with the current rating band. Rating pressure could arise in the event that subsidiary-level borrowings increase significantly and/or the holding company’s debt obligations are subordinated to those of the operating subsidiaries.

Strengths