MARC ASSIGNS PRELIMINARY RATING OF AA- TO WCT BERHAD’S PROPOSED RM1.0 BILLION MTN PROGRAMME WITH A STABLE OUTLOOK; AFFIRMS EXISTING DEBT AND SUKUK RATINGS

Aug 6, 2012 -
MARC has assigned a preliminary rating of AA- to WCT Berhad's (WCT) proposed RM1.0 billion 15-year Medium Term Notes (MTN) Programme. The rating carries a stable outlook. Concurrently, MARC has affirmed its existing debt and sukuk ratings with a stable outlook on WCT’s outstanding issuances. The list of WCT’s rated outstanding issuances is provided at the end of this announcement.
The ratings reflect the consolidated credit profile of the WCT group of entities, including its position as one of the largest domestic construction companies, sustained construction margins and comfortable liquidity position. Partially offsetting these factors are the downward trajectory of its revenue, its negative free cash flow and its rising debt level since 2010.
While WCT continues to expand its property investment portfolio and operations, its construction operations continue to account for the larger part of group revenue and profit. Its construction operations accounted for 78.4% of its revenue and 63.5% of the consolidated operating profit of all business segments in 2011. Nonetheless, the degree to which WCT is able to build a recurring and adequate income stream from its expanding investment property portfolio and derive satisfactory earnings and cash flow from its property development operations will become increasingly important rating drivers for WCT.
WCT's earnings diversification plan envisages increasing the contribution of its property development and property investment segments to a combined 50% of total group operating profit by 2016. The pursuit of WCT's diversification strategy, as evidenced by continued land bank acquisitions and the somewhat aggressive expansion of its investment properties portfolio, has contributed to pressure on its free cash flow generation and debt service coverage metrics.
In recent periods, WCT's outstanding order book has exhibited a sustained trend of shorter duration of construction work against a backdrop of lower construction spending. Nonetheless, MARC notes an improved level of order book replenishment in the first three months of 2012 compared to a year ago. As at March 31, 2012, WCT's work in hand stood at RM2.8 billion, providing earnings visibility for the next 30 months, compared to RM2.5 billion as at end-2011.
Given the somewhat muted near-term outlook for residential construction activity, MARC sees an increased reliance by the domestic construction sector on infrastructure spending to sustain construction activity. The key risk that WCT's construction business will continue to face is its exposure to cyclical downturns. At the same time, MARC notes that WCT's construction margins have also held up well in spite of construction material price increases and high levels of competition in its key markets of Malaysia and the Middle East. Additionally, the reduced working capital needs associated with a lower level of construction activity, has generally benefited the group's liquidity.
WCT's second-largest business segment, property development, posted year-on-year increases of 21.0% in revenue and 30.8% in operating profit in 2011. Nonetheless, contributions from this segment remain small at 18.2% of revenue and 21.3% of total segment operating profit. While the take-up rates of recent launches of residential property in the Iskandar region and Kota Kinabalu have been fairly strong, its recent launches of bungalow and terrace units at Bandar Bukit Tinggi drew lacklustre responses.
Also within the group's development pipeline are the office, service apartments and hotel components of its 12-acre mixed development project in the mature township of Kelana Jaya, following the completion of Paradigm Mall. WCT is in the preliminary stages of planning another mixed development project on a 57-acre site in another mature township in the Klang Valley, Overseas Union Garden. In the near term, MARC expects the moderating outlook for the property sector to weigh on property development revenue and earnings growth.
WCT's property investment portfolio accounted for less than 5.0% of its total revenue and 15.2% of total operating profit in 2011. With the completion of the 680,000 sq ft Paradigm Mall which became operational at end-May 2012, WCT's property investment portfolio currently consists of two suburban retail mall properties. MARC expects the rental operating cash flows of the two retail malls to be fairly resilient, providing RM100 million of rental income annually, supported by high occupancy rates.
Currently under construction, the development of the group's third retail mall at the new low-cost carrier terminal KLIA 2 is undertaken by a jointly-controlled entity Segi Astana Sdn Bhd on a build-operate-transfer basis. The retail mall is scheduled to commence commercial operations in April 2013. The project borrowings, a RM470 million MTN programme, have been raised as limited recourse debt. WCT has committed to cover construction cost overruns and debt service shortfalls during the project's first year of commercial operation. The rating agency understands that construction costs are under control, and views tenancy risk as the principal risk posed to the project and WCT in its operations phase.
WCT posted a second consecutive year of revenue decline in 2011 largely due to lower construction revenue. This was moderated by higher contributions from its property development and property investment segments. While consolidated revenue has fallen quite significantly in the last two years, its pre-interest earnings have remained relatively stable. WCT's construction revenue was up 10.5% in the first quarter of 2012 compared to the preceding year’s corresponding period.
WCT will fund its 2013 debt repayments with the proceeds from the issue of notes under the proposed MTN programme. Its free cash flow continues to be negative, its cash balances dropped to RM788.7 million at end-2011. WCT's borrowings are expected to rise above RM1.5 billion upon full drawdown of the notes under the MTN programme. On a pro-forma basis, WCT's net debt-to-equity ratio could peak at 0.56 times. The MTN programme is expected to provide WCT with significant financial flexibility until its revenue growth from its property development and property investment segments can match the debt servicing needs of additional debt required during its investment phase. In the near-to-intermediate term during WCT's investment phase, the group's consolidated financial profile will likely remain under pressure.
The stable rating outlook reflects the expectation that group revenue and earnings will remain satisfactory, and that WCT's debt leverage will remain at prudent levels.
The affirmed ratings are as follows:
• RM100 million Islamic Fixed Rate Serial Bonds at AA-ID
• RM300 million Islamic Commercial Papers/Medium Term Notes (CP/MTN) at MARC-1ID/AA-ID
• RM100 million Islamic CP/MTN at MARC-1ID/AA-ID
• RM300 million Redeemable Sukuk with Warrants at AA-IS
• RM600 million Fixed Rate Serial Bonds with Detachable Warrants at AA-

Contacts:
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my;
Rajan Paramesran, +603-2082 2233, rajan@marc.com.my.