Wednesday, Sep 27, 2000
WCT Engineering Bhd’s corporate debt rating of A– (s) [single A minus with support] reflects the group’s favourable and competitive position in the civil engineering and building segment of the construction industry, good track record and experienced management team. The issue is enhanced with the assignment of a sinking fund account which captures 10% of gross proceeds from identified contracts as well as external liquidity support in the form of an irrevocable banking facility of RM15 million. The rating also factors in WCT’s good financial profile; the product of its operational efficiencies and its conservative financial management. These factors are tempered by industry conditions that are competitive and cyclical, with an overhang of excess capacity in most of the property sub-sectors. Financial flexibility is moderate due to the lack of institutional shareholders.
Entry barriers into the civil engineering and building sectors are high due to its capital intensity. The ability to undertake extensive engineering work will weigh in favour of companies such as WCT Engineering. WCT’s enviable record as the principal sub-contractor for the earth works construction packages of the KLIA and the main contractor for the Sepang International F1 Circuit will further enhance the group’s reputation within the construction industry. The fact that more than 90% of its contracts are secured under a competitive tender basis is reflective of the cost advantage that WCT enjoys over its peers.
Rising from the ranks of a sub-contractor, WCT Engineering has accumulated the experience and technical expertise to undertake a diverse project mix and projects of large contract value. As at beginning 3Q 2000, WCT has a balance of RM690 million worth of secured contracts in its order book, of which 10% represents direct government jobs. These contracts would sustain the group’s revenue through to 2002. The lack of a firm order book beyond 2002 poses a business risk given the highly competitive and cyclical nature of the construction industry. Faced with an oversupply situation in most of the property sub-sectors, which has exerted downward pressure on margins, the construction industry is expected to grow only slowly in the near-to-medium term.
In a move to diversify its business, WCT had embarked on property development in 1996 through a joint venture with MTD Capital to undertake a mixed development project in Bandar Bukit Tinggi, Klang. With the target market being middle to upper income Klang residents, take-up rates for the launched units, thus far, have exceeded 85%. Despite the diversification, WCT still considers civil engineering and building construction as its core business.
Both revenue and profitability have exhibited an increasing trend over the past 10 years, reaching RM328.6 million and RM46.5 million respectively in FY2000. Although revenue declined by 20% in FY2000, profit before tax rose 35.9% aided by profit on disposal of assets and interest income. Debt leverage (adjusted for hire purchase financing) had also improved from 1.2 times in FY97 to 0.24 times in FY2000, against the strengthening in shareholders’ funds via the accumulation of retained earnings and rights issue made in FY98. Cash flow protection measures are at comfortable levels, backed by the healthy cash position accumulated over the years. The company’s liquidity position will also benefit from the low capital expenditure requirement over the next few years. A sinking fund will be established for the redemption of the bonds, into which will be credited 10% of proceeds from an aggregate of RM900 million future contracts to be identified in years two through four of the bond issue. The company’s past track record coupled with the strong possibility of securing a large project currently under tender provides assurance as to WCT’s ability to secure sufficient contracts. Any shortfall in the sinking fund account would be met from the RM15 million irrevocable banking facility to be secured by WCT.
WCT’s financial flexibility is moderate, limited somewhat by the lack of institutional shareholders. Offsetting this is the strong cash position built up over the years by the group.
Entry barriers into the civil engineering and building sectors are high due to its capital intensity. The ability to undertake extensive engineering work will weigh in favour of companies such as WCT Engineering. WCT’s enviable record as the principal sub-contractor for the earth works construction packages of the KLIA and the main contractor for the Sepang International F1 Circuit will further enhance the group’s reputation within the construction industry. The fact that more than 90% of its contracts are secured under a competitive tender basis is reflective of the cost advantage that WCT enjoys over its peers.
Rising from the ranks of a sub-contractor, WCT Engineering has accumulated the experience and technical expertise to undertake a diverse project mix and projects of large contract value. As at beginning 3Q 2000, WCT has a balance of RM690 million worth of secured contracts in its order book, of which 10% represents direct government jobs. These contracts would sustain the group’s revenue through to 2002. The lack of a firm order book beyond 2002 poses a business risk given the highly competitive and cyclical nature of the construction industry. Faced with an oversupply situation in most of the property sub-sectors, which has exerted downward pressure on margins, the construction industry is expected to grow only slowly in the near-to-medium term.
In a move to diversify its business, WCT had embarked on property development in 1996 through a joint venture with MTD Capital to undertake a mixed development project in Bandar Bukit Tinggi, Klang. With the target market being middle to upper income Klang residents, take-up rates for the launched units, thus far, have exceeded 85%. Despite the diversification, WCT still considers civil engineering and building construction as its core business.
Both revenue and profitability have exhibited an increasing trend over the past 10 years, reaching RM328.6 million and RM46.5 million respectively in FY2000. Although revenue declined by 20% in FY2000, profit before tax rose 35.9% aided by profit on disposal of assets and interest income. Debt leverage (adjusted for hire purchase financing) had also improved from 1.2 times in FY97 to 0.24 times in FY2000, against the strengthening in shareholders’ funds via the accumulation of retained earnings and rights issue made in FY98. Cash flow protection measures are at comfortable levels, backed by the healthy cash position accumulated over the years. The company’s liquidity position will also benefit from the low capital expenditure requirement over the next few years. A sinking fund will be established for the redemption of the bonds, into which will be credited 10% of proceeds from an aggregate of RM900 million future contracts to be identified in years two through four of the bond issue. The company’s past track record coupled with the strong possibility of securing a large project currently under tender provides assurance as to WCT’s ability to secure sufficient contracts. Any shortfall in the sinking fund account would be met from the RM15 million irrevocable banking facility to be secured by WCT.
WCT’s financial flexibility is moderate, limited somewhat by the lack of institutional shareholders. Offsetting this is the strong cash position built up over the years by the group.