MARC ASSIGNS PRELIMINARY RATING OF AA-IS WITH A STABLE OUTLOOK TO WCT HOLDINGS BERHAD'S PROPOSED RM1.5 BILLION SUKUK MURABAHAH PROGRAMME; AFFIRMS EXISTING DEBT RATINGS

Sep 26, 2014 -
MARC has assigned a preliminary rating of AA-IS with a stable outlook to WCT Holdings Berhad’s (WCT Holdings) proposed RM1.5 billion 15-year Sukuk Murabahah programme. Concurrently, MARC has affirmed its existing debt ratings with a stable outlook on WCT Holdings’ outstanding issuances as follows:

• RM300 million 7-year Islamic Commercial Paper (ICP)/Islamic Medium-Term Notes (IMTN) Programme (due April 2015) at MARC-1ID /AA-ID;
• RM600 million 5-year Fixed Rate Serial Bonds (due December 2015) at AA-; and
• RM1.0 billion 15-year MTN Programme (due April 2028) at AA-.

The ratings reflect WCT Holdings’ strong position in the domestic construction sector and the moderately diversified earnings profile arising from the group’s deepening involvement in property development and property investment activities. The ratings also incorporate WCT Holdings’ strong liquidity position and fairly aligned debt maturity profile. Constraining the ratings are, however, the group’s weak construction margins, slow construction order book replenishment and slower property sales as well as an increased reliance on internal contracts for construction projects.   
The proceeds from the Sukuk Murabahah programme will be utilised mainly to refinance upcoming debt maturities with the balance used for working capital and capital expenditure. WCT Holdings’ construction operations continue to be the major contributor to the group accounting for 67.6% and 51.3% of consolidated revenue and operating profit respectively in the first half ended June 30, 2014 (1HFY2014). The construction division’s earnings visibility, however, has weakened owing to a slower-than-expected replenishment of its order book. Of particular concern to MARC is that a significant proportion of the construction order book outstanding of RM3.0 billion as at end-1HFY2014 relates to in-house construction workflow, the bulk of which comprises property development and investment projects of the group’s property arm.
WCT Holdings’ property developments, which are mainly in the Klang Valley and Iskandar, have been affected by a slowdown in the domestic property sector. Sales of its ongoing units in projects, including the second block of Medini Signature and Skyz Jelutong@Bukit Jelutong, have received weak to modest responses to date. MARC expects the prevailing weak property market sentiments to weigh on the group’s property division in the near term. In respect of the group’s property investment and management operations, namely malls and hotel operations, the segment continues to generate steady, albeit modest, income streams. The successful opening of gateway@klia2 on May 2, 2014 has added an additional mall to the group’s existing two malls with another currently being developed in Johor Bahru. MARC observes that gateway@klia2 has achieved an approximately 80% occupancy rate as at end-August 2014 and is expected to provide stable revenue of approximately RM77.1 million per annum. 
For 1HFY2014, WCT Holdings’ consolidated revenue and pre-tax profit declined by 10.8% and 20.7% to RM868.7 million and RM102.2 million respectively, largely attributable to lower construction revenue and weaker sales performance for its ongoing property development projects in line with the softening domestic property market sentiments. Despite weaker earnings during the period, cash flow from operations (CFO) narrowed to negative RM319.7 million as compared to negative RM558.6 million which was due to the acquisition of land parcels in Overseas United Garden, Kuala Lumpur in 1Q2013. WCT Holdings’ free cash flow is expected to improve in the near term in the absence of lumpy outflows for land acquisitions. Nonetheless, any sizeable debt-funded acquisitions to expand its land bank for property development could pose downside risks to WCT Holdings’ credit profile particularly given the sharp increase in land prices and the weakening property market sentiments.  MARC notes that for FY2014, the group has committed to pay RM65.8 million for land acquisitions made in FY2013.
WCT Holdings’ liquidity remains strong with unrestricted cash balances of RM414.3 million in addition to unutilised cash lines of RM602.0 million as at end-1HFY2014, although its cash position has continued to decline in recent years. The group’s current leverage position remains commensurate with the current rating band with net debt-to-equity ratio of 0.59x as at 1HFY2014. MARC observes that WCT Holdings’ debt maturity profile has also improved in recent years following the refinancing of debt obligations with proceeds from longer term issuances.
The stable outlook takes into consideration that there will be no pronounced weakening in WCT Holdings’ financial performance as well as debt protection measures in the near term. Downward rating pressures could develop should its liquidity position be weakened materially by purchases of land parcels to undertake projects that may require long gestation periods. The ratings could also be pressured if subsidiary-level borrowings increase significantly and/or are subordinated to the holding company’s debt obligations.

Contacts:
Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my;
Yap Lai Ken, +603-2082 2247/ laiken@marc.com.my.