MARC has assigned a final rating of AA- to WCT Berhad's (WCT) proposed RM1.0 billion 15-year Medium Term Notes (MTN) Programme

Mar 29, 2013 -

MARC has assigned a final 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 also affirmed its MARC-1ID/ AA-ID and AA- ratings with stable outlook on WCT’s existing debt issuances, a list of which is provided at the end of the announcement.

Proceeds from the MTN issuance will be utilised largely to refinance WCT group’s existing borrowings, fund investment activities and finance working capital requirement.

WCT's senior unsecured 'AA-' debt ratings are premised on its moderate business risk profile as a construction and property group, in particular its ability to maintain its competitive positions within its key construction markets and track record as a township developer. The rating agency believes that WCT will be able to generate a fairly stable earnings stream in the next 12 to 18 months from its outstanding construction order book, existing property development projects and its investment property portfolio. WCT's liquidity and debt maturity profiles remain sound, mitigating in part its continued negative free cash generation.

The rating balances WCT's strategic rationale of expanding its investment property portfolio against the near-to-intermediate term impact on its financial profile, in particular its improving segmental diversification and the increase in group debt from its stepped-up expansion of its retail property portfolio. Moderating the ratings is WCT's exposure to cyclical construction and property sectors, the concentration of WCT’s construction order book in a relatively small number of large contracts, the sensitivity of its earnings growth and margins to competitive pressure and the group's rising debt levels.

Based on unaudited results for the financial year ended December 31, 2012, WCT's civil engineering and construction segment contributed around similar levels of operating profit as its property development segment (RM115.7 million and RM117.5 million respectively). MARC further notes that inter-segment turnover accounted for around 39% of its civil engineering and construction revenue during the year. Its property investment segment saw a 62% increase with rental contribution from newly opened Paradigm Mall at Kelana Jaya and a sharp increase in its operating profit to RM240.4 million from RM37.4 million a year earlier due to unrealised fair value changes on investment properties.

For FY2012, the group secured RM1.1 billion in new domestic projects (FY2011: RM143.0 million), bringing the total order book outstanding to RM3.7 billion (FY2011:RM2.5 billion). While the group's outstanding order book provides near-to-medium-term earnings visibility, MARC is somewhat concerned with the significant concentration of its construction order book in the Middle-east region. In addition, rising construction material prices and continued stiff competition in WCT's key construction markets will likely continue to exert pressure on its construction margins.
 
WCT's wholly-owned property development subsidiary, WCT Land Sdn Bhd, launched projects worth RM537.3 million during 2012. Its ongoing developments comprise two 28-storey condominium towers at 1Medini in Iskandar, Johor, which has achieved strong take-up rate and high-end residential houses at its flagship development Bandar Bukit Tinggi (BBT), in Klang, which has received modest response. Its contracted sales of RM490 million as of end-December 2012 and pipeline projects for launching with gross development value (GDV) of RM7.7 billion provide moderate earnings visibility. The group's replenishment of its land bank amid increasing land prices and the prevailing moderating trend in certain property sub-segments pose downside risks to the earnings growth and operating margins of its property development segment.

WCT’s second mall, the 680,000 sq ft-Paradigm Mall at Kelana Jaya commenced operations in May 2012, and achieved a commendable occupancy rate of 98% as at end-December 2012. Adjacent to the mall, MARC notes the ongoing construction progress on the other components namely an office tower, service apartments and hotel of the mixed-development project on the 14-acre site in Kelana Jaya. In addition, the group’s third retail mall is being built at the new low-cost carrier terminal, KLIA 2, which is expected to come on stream in 2Q2013. Undertaken by a jointly-controlled entity Segi Astana Sdn Bhd on a build-operate-transfer basis, work is progressing steadily with a completion rate of 93% and a pre-opening tenancy rate of 69% as of early March 2013. The retail property portfolio provides a stable recurring rental stream to the group. WCT is also in the preliminary stage of planning a similar mixed-development project on a 57-acre site in Overseas Union Garden (OUG) in KL, which it had acquired for RM450 million. In addition, the group has purchased an abandoned mall in Johor Bahru, for RM180 million; both of its recent acquisitions were funded by debt.

MARC observes that WCT group’s borrowings have steadily increased in recent years, standing at about RM1.82 billion at financial year-ending December 31, 2012 (unaudited FY2012) (FY2008: RM1.13 billion). Group borrowings would increase to RM2.32 billion assuming full draw down of the proposed RM1.0 billion IMTN without any refinancing of existing debt, translating to a net debt to equity ratio of 0.69 times. WCT’s consolidated net gearing ratio was 0.41 times as of end-2012 (FY2011: 0.34 times). MARC also notes that despite an improvement of WCT’s cash flow from operations (CFO) to RM236.9 million in FY2012, the group’s free cash flow (FCF) has remained negative for the last three consecutive years (FY2012: negative RM56.8 million) due to growth-related investments. However, MARC draws comfort from the group’s strong cash balance of RM1.08 billion as at end-FY2012.

At the holding company level, revenue, which consists of dividend income and contract revenue, reveal a fluctuating trend due mainly to cyclical construction activities. As at end-FY2012, DE ratio at the holding company level stood at 0.89 times (FY2011: 0.92 times). MARC notes that WCT's company level cash balance of RM712.9 million at end-December 2012 is sufficient to meet its near-term debt repayment of RM400.0 million.

Ratings maintenance assumes amongst other things that WCT would continue to refinance and term out its maturing debt on a timely basis and no pronounced weakening of its financial performance and debt protection measures, at both company and consolidated levels. Accordingly, MARC sees no short-term rating impact arising from the expected novation of WCT’s debts to newly formed investment holding company, WCT Holdings Berhad. Nonetheless, the rating agency remains mindful that rating pressure could arise in the event that the subsidiary level borrowings increase significantly, subordinating the holding company’s debt obligations to that of operating subsidiaries WCT Land and WCT.

The affirmed ratings are as follows:

• 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
• RM600 million Fixed Rate Serial Bonds with Detachable Warrants at AA-