MARC Ratings has affirmed its AA-, AA-_IS  and A_IS  ratings on WCT Holdings Berhad’s RM1.0 billion Medium-Term Notes (MTN) Programme, RM1.5 billion Sukuk Murabahah Programme and RM1.0 billion Perpetual Sukuk Musharakah Programme. Concurrently, the rating agency has revised the outlook on all the ratings to negative from stable.

The outlook revision is premised on the persistently high leverage position that WCT Holdings has not been able to address in a meaningful way as its planned asset disposals, proceeds from which would be used to pare down borrowings, have continued to be delayed. The rating action has also factored in the group’s weakening liquidity position as cash reserves have been used to support the group’s operations in recent periods.

Meanwhile, the ratings affirmation considers the group’s construction order book size of RM3.3 billion as at end-March 2023 that provides earnings visibility in the near term, and its steady income from investment properties. This notwithstanding, the steadily declining construction order book size since 2018 remains a rating concern.

As at end-March 2023, group borrowings stood at RM2.8 billion, translating to a gross debt-to-equity (DE) ratio of 0.97x (adjusted to include equity credit to the perpetual sukuk) and a net DE ratio of 0.91x. WCT Holdings was expected to pare down about RM200 million in borrowings by end-2022. However, the deleveraging process had been delayed by slower-than-expected collection of construction receivables. The group has indicated it will undertake asset sales and other measures in the near term, but execution risk remains a concern.

MARC Ratings notes that while WCT Holdings has a tender book of about RM9.0 billion comprising large contracts for rail infrastructure works and flood mitigation projects, among others, securing new contracts has been slow in recent years with no new contracts awarded in 2022. Assuming its current order book size, which is about 55% of the RM6.0 billion it had in 2018, is not replenished on a timely basis, the group’s financial performance would be impacted. Additionally, its low construction margin provides thin buffer for raw material and labour costs increases.

WCT Holdings has two ongoing property development projects with a total gross development value (GDV) of RM1.0 billion. The group has deferred new launches and prioritised the clearing of completed inventories, which declined to RM358 million in 1Q2023 (2021: RM708 million). The overall take-up rate for ongoing projects was 67% as at end-1Q2023 while unbilled sales stood at a modest RM299 million. Its investment properties — namely AEON mall in Bukit Tinggi and Paradigm Mall in Petaling Jaya and Johor — have recorded an overall steady occupancy level of above 90% and provide a steady rental income of about RM150 million to the group in 2022. In terms of hotels, occupancy rates have also risen: Le Meridien Hotel in Petaling Jaya to 43% (2021: 12%) and Premiere Hotel in Klang to 45% (2021: 17%).

During 1Q2023, group performance improved from the resumption of economic activities, with revenue and pre-tax profit rising to RM404.6 million and RM19.7 million (1Q2022: RM390.6 million; RM5.5 million, excluding land sale). However, cash flow from operations was mainly utilised to fund its sizeable working capital requirement. As a result, liquidity remained moderate at RM204 million as at end-March 2023 despite proceeds from property inventory clearing, land parcel sale, and the Meydan arbitration. The outstanding amount under the RM1.5 billion Sukuk Murabahah stood at RM1.01 billion and under the Perpetual Sukuk at RM821.5 million as of May 29, 2023; the call date for the first tranche of RM282 million is in September 2024.

MARC Ratings will review WCT Holdings’ ratings within the next six months. The ratings could be lowered if the group does not see any meaningful improvement in financial performance and debt metrics. The rating differential on the perpetual sukuk would remain at two notches. Conversely, notable and sustainable improvements in the group’s credit profile could lead to the ratings outlook being revised back to stable. 

The negative outlook considers the group’s relatively high leverage and the challenges it faces to meaningfully reduce its borrowings. 

We do not foresee any upside to the ratings over the near term.

The ratings could be lowered within the next six months if the group’s deleveraging plan does not materialise, and if its gross leverage position (adjusted to include equity credit to the perpetual sukuk) remains above 0.8x.