MARC has removed the ratings on WCT Holdings Berhad’s (WCT Holdings) RM1.0 billion MTN Programme and RM1.5 billion Sukuk Murabahah Programme from MARCWatch Developing. The ratings were placed on MARCWatch Developing on November 4, 2016 to enable the rating agency to reassess WCT Holdings’ business plan and the impact on its credit metrics following a major change in shareholders after the group’s founding members disposed their stakes. Following MARC’s review of the recent corporate development, the ratings have been affirmed at AA- and AA-IS respectively with a negative outlook.
MARC notes that WCT Holdings has largely retained its earlier plan to deleverage which entails share placement and asset monetisation, proceeds from which would be utilised to pare down its relatively high borrowings which remain a source of rating pressure. The rating agency further notes that as of to-date, WCT Holdings has announced a private placement of new shares of up to 10% of its total paid-up capital to raise about RM212.5 million while the RM347.0 million sale of its office tower, Ascent Paradigm, is in the documentation stage.
Notwithstanding these initiatives, MARC has maintained a negative outlook on the ratings, taking into account market and execution risks. Moreover, other components of these plans including the proposed sale of its malls are still in the early stages. MARC will likely revise the outlook from negative to stable once substantial progress has been made in the deleveraging exercise.
WCT Holdings’ strong construction order book and the stable revenue stream from its property investment segment, support the current rating affirmation despite the dampening demand in the property segment. Construction remains the group’s core business, contributing 80.7% to group revenue in 9M2016. Its construction order book has an outstanding balance of RM4.8 billion as at end-9M2016 (end-2015: RM4.8 billion), providing earnings visibility for the next two to three years.
WCT Holdings’ ongoing property development projects have a combined gross development value (GDV) of RM2.0 billion with a modest take-up rate of 42.5% as at end-November 2016. As at November 22, 2016, the group achieved sales of RM274.0 million against a target of RM600.0 million for the year. However, in MARC’s opinion, WCT Holdings’ total contracted sales of RM522.0 million as at end-9M2016 would provide earnings visibility for the next two to three years. WCT Holdings’ large land holding of around 934.2 acres of undeveloped land bank with concentration in Kuala Lumpur and Selangor, provide long-term potential for property development activities or land sales to generate cash flow.
For unaudited 9M2016, WCT Holdings’ revenue grew 29.2% y-o-y to RM1,480.4 million, driven by higher contributions from the construction and property investment segments. However, operating profits decreased by 48.8% y-o-y mainly due to an unrealised forex loss of RM9.0 million in 9M2016 compared to an unrealised forex gain of RM121.9 million in 9M2015. Excluding the forex translation effects, WCT Holdings would register a slightly higher operating profit of RM128.3 million (9M2015: RM111.1 million). Cash flow from operations (CFO) and free cash flow (FCF) deficits narrowed to RM94.3 million and RM311.4 million respectively on the back of the group’s cash preservation measures including deferring construction of investment properties and not declaring any interim dividend for 9M2016.
WCT Holdings’ consolidated debt stood at RM2.8 billion with a net debt-to-equity ratio (DE) of 0.87 times as at end-9M2016. However, with WCT Holdings’ deleveraging exercise, MARC estimates the pro-forma net DE ratio to reduce to around 0.56 times by end-9M2017.
The ratings outlook could be revised to stable if the group improves its leverage and liquidity positions. The ratings would be lowered if WCT Holdings’ efforts to reduce net debt do not progress as anticipated or if subsidiary-level borrowings increase or the holding company’s debt obligations are subordinated to those of the operating subsidiaries.
Contacts: Wan Abdul Muiz Wan Abdul Ghafar, +603-2082 2260/ firstname.lastname@example.org; Yap Lai Ken, +603-2082 2247/ email@example.com.
February 2, 2017