MARC AFFIRMS WCT BERHAD’S RATINGS AND MAINTAINS STABLE OUTLOOK

Feb 16, 2012 -
MARC has affirmed its long-term and short-term issue ratings of AA- and MARC-1 on WCT Berhad (WCT) with a stable outlook. A complete list of the ratings and rated issues is provided at the end of this announcement.

The ratings for WCT recognise the group's near-term revenue visibility and its past demonstrated ability to respond to changing market conditions balanced against the business and financial risks posed by the continuing expansion of its investment property portfolio as well as its modest free cash flow retention and the bunching of its debt maturities in 2013. The cyclicality of the group's construction and property development business also continue to constrain the ratings. MARC has not incorporated the potential for receivable impairment charges into the ratings and outlook with respect to the long outstanding construction receivables on WCT's balance sheet which are still the subject of ongoing arbitration. WCT's net exposure in respect of the arbitration stand at RM270.1 million as at September 30, 2011.

WCT reported lower construction segment revenues and profit in the nine months to September 30, 2011 (9MFY2011) compared to the preceding year corresponding period. WCT has posted declining construction revenues since FY2010, as a result of the difficult and competitive environment in the domestic as well as its key overseas construction markets. Its outstanding order book has been characterised by increasing client and geographic concentration; out of five new construction contracts secured in 2010, three accounted for over 90% of the aggregate value of the orders. These include the construction of the RM1.2 billion headquarters for Qatar's Ministry of Interior and the Kuala Lumpur International Airport 2 (KLIA) Integrated Complex. The KLIA 2 Integrated Complex construction works, meanwhile, are being undertaken pursuant to a built-operate-transfer concession awarded to indirect subsidiary Segi Astana Sdn Bhd (Segi Astana) by Malaysian Airport Holdings Berhad. The construction segment's revenue and earnings in 2012 are expected to be sustained by WCT's outstanding order book of RM2.97 billion as of September 30, 2011.

WCT's exposure to the retail property market segment is set to increase further on account of the airport mall to be developed by Segi Astana and operated under the 25-year concession and the Paradigm retail mall that the group is developing in Kelana Jaya which will be a 70:30 joint-venture with the Employees Provident Fund. The long investment horizons associated with the retail properties concerned, the reliance on a considerable amount of project finance debt to fund the construction of the KLIA 2 Integrated Complex and the sensitivity of cash flow generation to tenant quality and occupancy rates could weigh on the group's credit profile should the performance of the investment properties fall short of that which is required to sustain operating cash flows to debt service coverage at current levels. WCT has also committed to provide a fairly significant amount of financial support for Segi Astana during the construction phase and first year of commercial operations which could exert pressure on WCT's credit profile.

Property development revenues for 9MFY2011 showed a marginal increase to RM187.1 million from RM184.5 million for the preceding year corresponding period. However, operating profit fell to RM50.7 million from RM58.1 million. The focus of the group's domestic property development activity continues to be on its Bandar Bukit Tinggi (BBT) township in Klang, and in the Iskandar region where it is developing residential properties under a joint-venture with Iskandar Investment Berhad. WCT recently launched the RM700 million 1-Medini Residences in Iskandar providing revenue visibility for FY2012 in addition to its ongoing development of the third phase of BBT, Bandar Parklands. Meanwhile, Vietnam's weak economic growth outlook and property market sentiments have resulted in the group taking a cautious approach to its property ventures in the country, namely its Platinum Plaza project and mixed residential and commercial development in Ho Chi Minh City. The aforementioned developments in Vietnam should limit the group's exposure to increased near-term economic risks posed by the subdued growth outlook, and high borrowing costs and inflation rates in Vietnam.

For 9MFY2011, WCT posted consolidated revenues and pre-tax profits of RM1.05 billion and RM153.4 million respectively. Its full year profit is expected to come in lower than FY2010's RM257.6 million, mainly on account of its lower construction earnings. Its net cash flow from operations (CFO) rose to RM 96.0 million compared to a deficit of RM60.5 million for FY2011 mostly due to reduced incremental working capital needs during the nine-month period. The cash flow received from the conversion as well as issuance of warrants and share options exercised during the period of RM86.0 million and higher internally generated cash flow supported the RM283.5 million debt pay-down and a RM60.3 million dividend payout during the nine months. WCT's debt maturity schedule appears manageable in FY2012 with RM140.0 million due under its rated facilities against its cash and cash equivalents of RM1.07 billion as of September 30, 2011. However, MARC notes a bunching of debt maturities in the subsequent year with RM500.0 million coming due in FY2013. Drawdowns of project finance debt by Segi Astana are likely to keep the group's consolidated leverage measures at around 1.0 times despite continuing net debt repayments at holding company level.

The stable outlook for the ratings also assumes continuation of the group's prudent debt management and the maintenance of a comfortable liquidity position.

The affirmed ratings are as follows:
• RM300 million Redeemable Sukuk with Warrants at AA-IS;
• RM300 million Islamic Commercial Papers/Medium Term Notes (CP/MTN) at MARC-1ID/AA-ID;
• RM100 million Islamic Fixed Rate Serial Bonds at AA-ID;
• RM100 million Islamic CP/MTN at MARC-1ID/AA-ID.
• RM600 million Fixed Rate Serial Bonds with Detachable Warrants at AA-

Contacts:
Ahmad Gazzara Czillich 03-2082 2259/ gazzara@marc.com.my;
Rajan Paramesran 03-2082 2233/ rajan@marc.com.my.