MARC has affirmed WCT Berhad’s (WCT) issue ratings as follows:

The rating outlook is revised to stable from developing. The rating actions are premised on WCT’s strong liquidity position as reflected by its sizeable cash and bank balances of RM796 million as at June 30, 2010, which MARC expects to be utilised towards meeting the group’s heavy debt maturities, the bulk of which is due by April 2011. Moderating the ratings are concerns on WCT’s near- to intermediate-term business prospects given the sharp decline in its order book as a result of the slower-than-expected pace of rollout of major construction contracts in its primary domestic market and the weak construction outlook in the Middle East where the group has been able to make major inroads in recent years. Nevertheless, MARC notes that at the current lower level of order book relative to its peak in 2007, the group’s working capital requirements have reduced considerably, enabling it to maintain a strong cash position relative to its demanding upcoming debt maturity profile. The group has RM410 million, or 41% of its total debt maturing in the next 12 months 

Since MARC’s last review in December 2009, WCT’s protracted arbitration proceedings with Meydan Group LLC, the developer of Nad Al-Sheba Racecourse project in Dubai, and Bahrain Asphalt Establishment BSC, a subcontractor of the Durkhan Highway project in Qatar, remain pending. However, MARC notes that there will be no further operational cash flow impact, although retained earnings are likely to be marginally affected.

For the first six months ended June 30, 2010 (1HFY2010), WCT’s order book declined sharply to RM2.18 billion from RM3.38 billion in FY2008, providing earnings visibility only for the next 12 months. However, MARC understands that the group is in advanced negotiations for several major contracts and draws comfort from WCT’s position as one of the largest domestic construction companies and its longstanding track record of having undertaken major projects both in Malaysia and the Middle East, supporting its ability to secure new projects. Nonetheless, poorer-than-expected construction order book replenishment could exert pressure on WCT’s ratings.

WCT’s revenue rose sharply by 23% to RM4.67 billion in FY2009 (FY2008: RM3.80 billion) mainly on account of completion and delivery of major projects, including the Yas Marina F1 Circuit in Abu Dhabi, during the year. The group’s pre-tax profit increased by 32.9% to RM211.1 million compared to the previous year. Despite the improvements year-on-year, operating profit margins remained modest at 5.2% (FY2008: 4.8%), in part due to lower margin projects undertaken in Malaysia. Cash flow from operations (CFO) rose to RM284.7 million from negative RM30.4 million in FY2008, resulting in stronger CFO interest rate coverage, while debt-to-equity improved to 0.67 times in FY2009 from 0.83 times in FY2008.  For its 1HFY2010 interim results, WCT’s revenue and pre-tax profit was 56.4% and 22.5% lower compared to the corresponding period in 2009 due to the group’s lower order book. 

With the decline in its external construction order book, MARC believes the group’s property development operations may take up the slack in the subsequent quarters. Its wholly-owned subsidiary, WCT Land Sdn Bhd, has remaining undeveloped land bank of 335 acres in its flagship development, Bandar Bukit Tinggi, in Klang, Selangor earmarked for mid to high-end property development with an estimated gross development value (GDV) of RM808.7 million. Its other project is the Paradigm, an integrated mixed development consisting of a shopping mall and office development on 12.9 acres, located along the LDP Expressway in Kelana Jaya, Petaling Jaya. The project, which has a GDV of RM1.4 billion, is slated for completion by 2013. The Paradigm is a 70:30 joint venture with national social security provider Employees Provident Fund, a substantial shareholder of WCT with a current 21% equity interest in WCT, up from 14% since MARC’s last review. WCT Land Sdn Bhd has also entered into a 70:30 joint-venture with Medini Land Sdn Bhd, a wholly-owned subsidiary of Iskandar Investment Berhad, to develop the 1Medini residential project in Iskandar Malaysia which has a GDV of RM600 million.

MARC notes WCT’s planned overseas foray into commercial property development, the RM2.2 billion Platinum Plaza Development project in Binh Chanh District in Ho Chi Minh City, the construction of which is expected to commence by beginning 2011. MARC also notes that while the Vietnam property venture has the potential to bolster the group’s earnings and cash flow generation capabilities, the funding structure and eventual bottom line impact on the group results is yet to be seen. Of concern to the rating agency is the cyclical behaviour of the property market and the exacerbating influence of the recent influx of foreign property ventures into the country.

Contacts:  
Rajan Paramesran 03-20902233/ rajan@marc.com.my ;
Jason Kok 03-2090 2258 jason@marc.com.my.