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

The affirmed ratings mainly reflect WCT Holdings’ lengthy track record as a major domestic construction player with sizeable infrastructure and building contracts that provide earnings visibility. This strength is moderated by a sizeable working capital requirement that has weighed on group liquidity. The slower-than-expected deleveraging process that has kept its high leverage position at an elevated level remains a key rating concern.

Group borrowings are expected to decline to about RM2.6 billion by end-2022, translating to a gross debt-to-equity ratio (DE) of 0.92x (adjusted to include equity credit to the perpetual sukuk). We understand that proceeds from planned asset disposals of about RM260 million and a repayment of RM100 million sukuk in March 2023, would reduce borrowings to circa RM2.3 billion by 1H2023 (2020: RM3.0 billion). Further reduction in borrowings would depend on timing of disposals as well as the working capital requirement from the increase in the group’s construction order book. Proceeds from the Meydan arbitration awards amounting to RM313 million over the next seven quarters would ease the working capital requirement. 

Group construction order book, which stood at RM4.1 billion as at end-June 2022, could be bolstered in the near term by its tender book amounting to about RM9.5 billion which would include contracts for healthcare construction, flood mitigation works, and rail infrastructure works. MARC Ratings notes construction margins continue to be low, providing thin buffer for material price and labour cost increases. In regard to property development, WCT Holdings’ ongoing projects carry a total gross development value (GDV) of RM1.1 billion, reflecting the decline in new launches and increased focus on clearing inventory, which stood at RM433 million as at 1H2022 (end-2021: RM470 million). Average take-up rate stood at a moderate 60% while unbilled sales amounted to RM335 million. 

We note that the performance of the property investment division has rebounded with occupancy rate for its Premiere Hotel in Klang increasing to 35.8% (end-November 2021: 15.1%) and Le Meridien Hotel in Kelana Jaya to 42.2% (end-November 2021: 9.7%). WCT Holdings is planning to dispose of the Premiere Hotel for RM85 million in 2H2023, which is part of its non-core asset disposal strategy to strengthen the group’s balance sheet.

The stable outlook reflects our expectation that the outcome of the ongoing deleveraging exercise will  improve the group’s leverage ratios.

We do not foresee any upside to the rating over the next 12-18 months.

A rating and/or outlook revision would depend on if there is a deviation from the group’s committed deleveraging plan to lower its gross leverage position (adjusted to include equity credit to the perpetual sukuk) to 0.80x by 1H2023. The rating would also come under pressure if group financial performance deteriorates substantially.