MARC has affirmed its ratings on WCT Holdings Berhad’s RM1.0 billion Medium-Term Notes (MTN) Programme and RM1.5 billion Sukuk Murabahah Programme at AA- and AA-_IS. The ratings outlook has been revised to negative from stable. 

The outlook revision considered the slower-than-expected progress to reduce WCT Holdings’ elevated leverage position which is unlikely to be addressed meaningfully over the near term. The group has faced a prolonged delay to monetise its assets by divesting its investment properties to a real estate investment trust (REIT), an integral component of its deleveraging plan. 

The ratings affirmation is underpinned by sizeable government-related infrastructure contracts and building construction projects that provide earnings visibility over the medium term. WCT Holdings’ longstanding position as a key domestic construction player places the group in good stead to vie for future contracts. The group’s investment properties, which include five shopping malls, generate a steady but moderate income stream that reduces earnings volatility. Notwithstanding these factors, WCT Holdings’ cash flow generation has been impacted by slower collection from construction projects and property sales, leading to a continued reliance on borrowings to fund working requirements. 

As at end-June 2018, total borrowings rose to RM3.6 billion, translating into a gross debt-to-equity (DE) ratio of 1.15x (2017: RM3.3 billion; 1.04x). The group is expected to increase collection from contracts, property and land sales, proceeds from which will be utilised to reduce borrowings. MARC estimates these proceeds to be about RM430 million and will provide a proforma net DE ratio of about 0.88x by end-2018. The group needs to further improve its cash flow generation and strengthen its debt metrics to below 0.70x by mid-2019, failing which downward rating pressure will increase. 

For 1H2018, cash flow from operations (CFO) was still negative RM15.0 million, albeit a slight improvement from negative RM22.2 million as at end-2017. Over the medium term, the group’s earnings visibility will mainly be from its sizeable construction contracts that include infrastructure contracts for the Light Rail Transit 3 (LRT3) and Mass Rapid Transit 2 (MRT2) projects (which are worth a combined total of RM2.3 billion) and several infrastructure and building projects. Total construction order book stood at RM7.2 billion including recent contracts worth RM1.77 billion from a related entity for the Pavilion Damansara Heights commercial development. 

WCT Holdings’ property division continues to be affected by weak sentiment with property sales declining sharply y-o-y to RM73.0 million and contracted sales declining to RM161.0 million in 1H2018 (1H2017: RM131.7 million; RM322.0 million). In light of the slower take-up rates for ongoing and completed projects, the group’s working capital requirement has come under pressure from the buildup in inventory which has grown to RM726.0 million as at end-August 2018. MARC understands that the group is undertaking measures to clear its inventory through downward repricing and promotional activities to reduce holding costs. 

MARC expects WCT Holdings to expedite plans to reit its commercial properties following a legal resolution in its favour on the Bandar Bukit Tinggi (BBT) Mall in Klang, Selangor. The REIT exercise will involve Paradigm Mall in Petaling Jaya, BBT Mall and two hotels. The group also plans to partially divest its Paradigm Mall in Johor Bahru; proceeds from the exercise will support its deleveraging exercise. 

In 1H2018, the group recorded a 41.4% and 88.4% y-o-y increase in revenue and operating profit to RM1.2 billion and RM178.9 million. Of the total revenue, about 77.0% was contributed by the construction segment. Free cash flow was in deficit of RM77.6 million but substantially lower than the negative RM319.6 million as at end-2017. The improvement was partly due to receipts of the first milestone payment of RM253.0 million from TRX City Sdn Bhd in May 2018. As at end-1H2018, WCT Holdings exhibited a moderate liquidity position and financial flexibility with cash and bank balances of RM558.1 million. Its outstanding under the rated facilities stood at RM2.26 billion as at end-June 2018.

Major Rating Factors 

Strengths

• Established track record in the construction industry;
  
• Sizeable construction order book provides earnings visibility; and
  
• Steady rental income from investment properties.