Revises outlook to negative
MARC has affirmed its long-term ratings on WCT Holdings Berhad's (WCT Holdings) debt and sukuk issuances but has revised the ratings outlook to negative from stable. WCT Holdings' rated debt and sukuk issuances are as follows:
RM600.0 million 5-year Fixed Rate Serial Bonds (due December 2015) at AA-;
RM1.0 billion 15-year MTN Programme (due April 2028) at AA-; and
RM1.5 billion 15-year Sukuk Murabahah (due October 2029) at AA-IS.
The affirmed ratings incorporate WCT Holdings' longstanding construction track record, its improved order book and its moderately diversified earnings profile from property development and property investment activities. The outlook revision is premised on WCT Holdings' weakening credit metrics, in particular its leverage ratios. As at June 30, 2015 (1HFY2015), its gross debt-to-equity (DE) ratio rose to 1.05 times from 0.85 times as at end-FY2013. The rating agency notes that the increased borrowings, which stood at RM2.4 billion as at end-1HFY2015 (up from RM1.9 billion at end-FY2013), have largely gone to fund land acquisitions. The potentially long gestation period to develop some of these land parcels to generate positive cash flows remains a key concern, particularly in view of weakening property market sentiments.
As at end-July 2015, the group's ongoing property projects recorded a low overall average take-up rate of 45.4%; its ongoing projects have an aggregate gross development value (GDV) of RM1.9 billion and are scheduled to be completed between 2015 and 2017. MARC notes with concern that the carrying cost of the developments would weigh on the group's cash flows, which have remained negative since FY2013. For mid-August 2015, the group recorded property sales of about RM241.0 million, which may fall short of the revised sales target of RM584.0 million for the full year. However, MARC notes contracted sales of RM593.0 million will provide some earnings visibility over the near term.
Due largely to slower in-house property development activities, WCT Holdings' internal contracts declined to RM946.0 million as at end-1HFY2015 (end-FY2014: RM1.1 billion); the external orderbook, however, was boosted by the sizeable QAR1.2 billion Lusail Development Project in Qatar in which it has a 70% interest. This contributed to an increase in construction order book to RM3.4 billion as at end-1HFY2015 (end-FY2014: RM3.1 billion).
While WCT Holdings' construction segment would remain the largest contributor to the group, accounting for 72.8% and 44.2% of consolidated revenue and operating profit respectively in FY2014 (property development: 23.6%; 37.8%), MARC expects construction margins to remain thin amid competitive pressures. Its property investment division's contribution to consolidated revenue and operating profit remained modest at 3.6% and 18.0% respectively in FY2014. However, MARC expects operating profit from its property investment joint ventures, which own the PJ Paradigm and gateway@klia2 malls, to improve in FY2015 upon full-year contribution from the latter.
For 1HFY2015, unaudited revenue and operating profit stood at RM773.9 million and RM112.8 million respectively (1H2014: RM868.7 million; RM123.4 million). However, cash flow from operations (CFO) and free cash flow (FCF) recorded deficits of RM260.2 million and RM324.5 million respectively for the same period. The negative FCF resulted from ongoing construction of the JB Paradigm development in Johor Bahru, capital expenditure and payment for the Rawang land acquisition. WCT Holdings also purchased 19.5 acres of land in Klang in August 2015 for RM118.0 million, bringing its total undeveloped land bank to 948.3 acres.
WCT Holdings' gross DE could potentially increase to 1.21 times due to capital commitments despite a recent rights issue that raised RM107.9 million. MARC notes that WCT Holdings has sufficient financial flexibility and would be able to draw down another RM2.2 billion from unutilised facilities before breaching the financial covenants under the rated programmes. In addition, its debt repayment profile is well aligned with long-term debt comprising 77.3% of total debt as at end-1HFY2015. The rating agency understands that WCT Holdings intends to reduce its debt with proceeds from claims following the resolution of the arbitration proceedings against Meydan Group LLC in its favour. WCT Holdings was awarded AED1.2 billion from the proceedings, and the group could receive the proceeds within two to three years. The group has plans to inject its AEON Mall and PJ Paradigm Mall into a real estate investment trust (REIT) as well as partially divest the Rawang land, the proceeds of which are expected to be utilised to pare down its debt.
The ratings would be lowered if WCT Holdings' performance continues to weaken over the near term or if leverage and cash flow metrics do not improve to be within the current rating band. Additionally, rating pressure could also arise if subsidiary-level borrowings increase and/or holding company's debt obligations are subordinated to those of the operating subsidiaries. The ratings outlook could be revised to stable if the group improves its leverage position and/or cash flow metrics are sufficiently restored to levels that are commensurate with the ratings.
Contacts: Ngiam Tee Wei, +603-2082 2280/ teewei@marc.com.my; Nicola Tan, +603-2082 2262/ nicola@marc.com.my ; Yap Lai Ken, +603-2082 2247/ laiken@marc.com.my.
© Press Release 2015
