During the quarter in review, the construction and property development company saw its revenue grow 14.1% to RM539.79mil from RM472.88mil in the previous corresponding period, while its earnings per share increased to 2.71 sen from 2.62 sen previously.
KUALA LUMPUR: Malaysian Rating Corporation Bhd (MARC) has lowered the ratings outlook for WCT Holdings Bhd
due to the slower-than-expected progress to reduce its elevated leverage position which is unlikely to be addressed meaningfully over the near term.
The rating company said on Friday the group faced a prolonged delay to monetise its assets by divesting its investment properties to a real estate investment trust (REIT), an integral component of its deleveraging plan.
As at end-June 2018, WCT Holdings' total borrowings rose to RM3.6bil, translating into a gross debt-to-equity (DE) ratio of 1.15 times (2017: RM3.3bi; 1.04 times).
“The group is expected to increase collection from contracts, property and land sales, proceeds from which will be utilised to reduce borrowings.
“MARC estimates these proceeds to be about RM430mil and will provide a proforma net DE ratio of about 0.88 times by end-2018. The group needs to further improve its cash flow generation and strengthen its debt metrics to below 0.70 times by mid-2019, failing which downward rating pressure will increase,” it said.
MARC affirmed WCT Holdings's RM1bil medium-term notes (MTN) programme and RM1.5 billion Sukuk Murabahah Programme at AA- and AA-IS.
The ratings affirmation was underpinned by sizeable government-related infrastructure contracts and building construction projects that provide earnings visibility over the medium term.
WCT Holdings’ long-standing position as a key domestic construction player places the group in good stead to vie for future contracts. The group’s investment properties, which include five shopping malls, generate a steady but moderate income stream that reduces earnings volatility.
However, MARC noted WCT’ Holdings's cash flow generation has been impacted by slower collection from construction projects and property sales, leading to a continued reliance on borrowings to fund working requirements.
For 1H2018, cash flow from operations (CFO) was still negative RM15mil, albeit a slight improvement from negative RM22.2mil as at end-2017.
Over the medium term, the group’s earnings visibility will mainly be from its sizeable construction contracts that include infrastructure contracts for the Light Rail Transit 3 (LRT3) and Mass Rapid Transit 2 (MRT2) projects (which are worth a combined total of RM2.3bil) and several infrastructure and building projects.
Total construction order book stood at RM7.2 billion including recent contracts worth RM1.77bil from a related entity for the Pavilion Damansara Heights commercial development.
WCT Holdings’ property division continues to be affected by weak sentiment with property sales declining sharply on-year to RM73mil and contracted sales declining to RM161mil in 1H2018 (1H2017: RM131.7mil; RM322mil).
In light of the slower take-up rates for ongoing and completed projects, the group’s working capital requirement has come under pressure from the build-up in inventory which has grown to RM726 mil as at end-August 2018.
“MARC understands that the group is undertaking measures to clear its inventory through downward repricing and promotional activities to reduce holding costs.
“MARC expects WCT Holdings to expedite plans to REIT its commercial properties following a legal resolution in its favour on the Bandar Bukit Tinggi (BBT) Mall in Klang, Selangor.
“The REIT exercise will involve Paradigm Mall in Petaling Jaya, BBT Mall and two hotels. The group also plans to partially divest its Paradigm Mall in Johor Bahru; proceeds from the exercise will support its deleveraging exercise,” it said.
In 1H2018, the group recorded a 41.4% and 88.4% on-year increase in revenue and operating profit to RM1.2bil and RM178.9mil. Of the total revenue, about 77.0% was contributed by the construction segment.
Free cash flow was in deficit of RM77.6mil but substantially lower than the negative RM319.6mil as at end-2017.
The improvement was partly due to receipts of the first milestone payment of RM253mil from TRX City Sdn Bhd in May 2018.
As at end-1H2018, WCT Holdings exhibited a moderate liquidity position and financial flexibility with cash and bank balances of RM558.1mil. Its outstanding under the rated facilities stood at RM2.26bil as at end-June 2018.
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