MARC has affirmed the ratings of WCT Holdings Berhad’s RM1.0 billion Medium-Term Notes (MTN) Programme and RM1.5 billion Sukuk Murabahah Programme (sukuk) at AA- and AA-_IS. Concurrently, MARC has assigned a preliminary rating of A with a stable outlook to WCT Holdings’ proposed Perpetual Sukuk Musharakah Programme (perpetual sukuk) of up to RM1.0 billion. The rating outlook on the perpetual sukuk is consistent with MARC’s revision of the ratings outlook on WCT Holding’s existing senior sukuk and debt programmes to stable from negative.

The outlook revision factors in the expected improvement in WCT Holdings’ leverage and liquidity positions through the issuance of the proposed perpetual sukuk, proceeds from which will be utilised to early redeem RM800.0 million MTNs maturing in 2020 while internal cash will be used to early redeem a total of RM300.0 million sukuk maturing in 2021 and 2022. The exercise is expected to reduce group borrowings to RM2.9 billion (1H2019: RM3.6 billion) and the gross debt-to-equity (DE) ratio to about 0.81x (1H2019: 1.13x). The perpetual sukuk issuance would strengthen WCT Holdings’ capital structure owing to the 50% equity credit accorded to the issuance in line with MARC’s approach to evaluating hybrid securities.

The ratings affirmation is underpinned by the group’s sizeable government-related infrastructure contracts and commercial building construction projects that provide earnings visibility over the medium term. This is supported by the steady but moderate income stream from the group’s investment properties which include five shopping malls. The ratings are moderated by the challenging property market conditions that have led to a continued build-up in inventory levels and by irregular cash flow generation that have weighed on cash flow metrics. The ratings and outlook could come under pressure if the planned and further deleveraging exercises do not result in the satisfactory improvement in its debt metric the gross DE ratio to about 0.8x over the next 12 months.

As at end-March 2019, WCT Holdings’ construction order book stood at RM6.1 billion, of which the LRT3 project (outstanding contract value: RM1.37 billion), Pan Borneo (Sarawak) highway works (RM654 million) and Pavilion Damansara Heights phase 1 superstructure works (RM1.72 billion) represent sizeable contracts. Going forward, contract replenishment could be challenging given the potential slowdown in government infrastructure project flow, stemming from the need to strengthen government finances.

For 1H2019, the group recorded a 20.2% y-o-y revenue decline to RM964.8 million, due largely to the near-completion of its major construction project packages under the RM765 million Tun Razak Exchange (TRX) and the RM1.24 billion refinery and petrochemical integrated development (RAPID) projects. Both projects are scheduled for completion by end-2020 and end-2019 respectively.

WCT Holdings’ property division continued to contend with high unsold inventory of RM918.0 million as at May 12, 2019. MARC understands that the group is undertaking measures to clear its inventory by improving sales and pricing strategies as well as by capitalising on the government home ownership campaign. The group has two ongoing property projects – the Waltz Residences in KL with a gross development value (GDV) of RM447 million and Aronia Apartments in Klang with a GDV of RM80 million – that have recorded modest take-up rates. Unbilled sales remain modest at RM116 million. The group has sizeable land bank of 831 acres, some of which are expected to be sold to improve liquidity.

WCT Holdings registered a 16.8% y-o-y decline in pre-tax profits to RM98.2 million in 1H2019. However, cash flow from operations (CFO) improved to RM172.8 million (1H2018: negative RM15.0 million), mainly due to proceeds from land parcels disposal and an industrial building sale totalling RM64.2 million, as well as collection of payments for local construction projects. Moving forward, cash flow generation could strengthen upon the progress of its sizeable construction works, realisation of the group’s asset monetisation plans as well as proceeds from the disposal of land in Klang.

Contacts:
Lim Chi Ching, +603-2717 2963/ chiching@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my