WCT 3Y bond at 5.55% IPG: Attractive yield, but mind the risks

- Following the disposal, WCT will see a visible reduction in its leverage, where debt to total property assets is projected to drop to 83%, while net debt to property assets fall to 65%.

- Paradigm REIT can tap into WCT’s real estates such as Hyatt Place Johor Bahru, Le Meridien Petaling Jaya, Premiere Hotel Klang, gateway@klia2 and so forth, which would facilitate further deleveraging for WCT.

- WCT is definitely racing against time to secure fresh contracts, and while there is no certainty of Bahrain MoU will come to fruition, that’s where we hope WCT will find replenishment.

- The expected RM66 million in annual interest savings is projected to improve the post-REIT interest coverage ratio back to a much barely passable 1.29 times, still sits in borderline zone.

- Given that the bond tenure (3Y) extends beyond the current E&C orderbook contribution timeline (approx. 2.4 years), we are adopting a more cautious stance on this particular issuance. This issuance would be more appropriate for investors with a high risk appetite who are confident in WCT’s ability to replenish its orderbook.

- In comparison, we view Solarvest’s upcoming 3-year bond (5.45% IPG) more favorably. Despite the slightly lower yield, it offers a more balanced risk-return profile due to lower credit risk.

Paradigm REIT to list on Bursa Malaysia main market

WCT has pushed forward with the listing of Paradigm REIT on Bursa Malaysia main market, with listing date tentatively scheduled on 10 June 2025. As previously mentioned, three properties from WCT (Paradigm Petaling Jaya, Paradigm Johor Bahru and Bukit Tinggi Shopping Centre Klang) will be disposed to the REIT, garnering over RM1.4 billion in cash and 65% stakes in Paradigm REIT for WCT.   

Deleverage in sight, debt to total property assets set to fall to 83%

Following the disposal, WCT will see a visible reduction in its leverage, where debt to total property assets is projected to drop to 83%, while net debt to property assets fall to 65%.

Table 1: Credit Metrics

Right of first refusal (ROFR) to acquire WCT assets

Another thing worth highlighting is that Paradigm REIT has a right of first refusal (ROFR) with WCT, which is a right but not obligation to purchase any relevant assets which WCT looks to dispose. This allows Paradigm REIT to tap into WCT’s real estates such as Hyatt Place Johor Bahru, Le Meridien Petaling Jaya, Premiere Hotel Klang, gateway@klia2 and so forth, which would facilitate further deleveraging for WCT.

Nonetheless, to adhere to REIT’s statutory debt limit at 50% of total asset value, Paradigm REIT at current stage can only take on additional debt of approx. RM396 mil (assuming no increase in assets value). Hence, any further disposal will likely take place next year (2026).

Table 2: Some of WCT’s asset value as at 31 Dec 2024

Imperative for fresh contracts to replenish orderbook

WCT’s outstanding order book as at 31 March 2025 stood at RM2.5 billion, a contraction from the RM2.8 billion a quarter ago with the continued progress in engineering activity. We can’t help but feel apprehensive for its diminishing orderbook size, as the current orderbook amounts to just 2.4x of FY24 engineering and construction revenue. If there’s no replenishment, we can see a situation where engineering and construction segment will stop contributing from 3Q27 onwards. Remember that the segment itself has historically contributed to 50%-60% of total revenue, where the absence of its contribution will be felt starkly.

While from a different lens, property development segment and property investment & management segment have overtaken engineering segment’s role in terms of operating profit contribution, it is still an important segment for WCT nonetheless.

For now, we do see WCT signed two MOUs with Bahrain, 1) with Bahrain’s Ministry of Housing and Urban Planning in a collaboration to develop and construct 3,000 social housing villas in Madinat Khalifa; and 2) with Tahliya Water Treatment and Saudi Water Authority to advance brine recovery solutions for desalination plants in Bahrain. Under the MoU, WCT Bahrain will oversee design and construction.

With that said, a MoU (memorandum of understanding) is not a legally binding contract and a valid contract is yet to be penned, should there is any.

For Penang LRT project, the first phase amounting to over RM8 billion has been awarded to Gamuda’s joint venture, leaving phase two and turnkey system contract up for grab. As turnkey system isn’t WCT’s forte, the segment where WCT can contend will be in phase two, linking Macallum station on Penang Island to Penang Sentral in Butterworth through a cross-channel bridge, estimated to be worth RM5 billion. Other than WCT, several prestigious names are vying for the project, like MMC Engineering, Gamuda Berhad, IJM Corp, Sunway Construction, MRCB and more. Hence, it will be a tough fight for WCT. 

WCT is definitely racing against time to secure fresh contracts, and while there is no certainty of Bahrain MoU will come to fruition, that’s where we hope WCT will find replenishment.

Recorded RM278 million net profit in FY24, but largely owing to one-off remeasurement

** taking FY24 for full year analysis

The group has recorded RM278 million net profit in FY24, largely owing to the RM184 million net gain on remeasurement of interest in a jointly controlled entity. Without the remeasurement, net profit will be at RM94 million, still an improvement compared to net loss of RM254 mil in FY23 (due to construction prolongation, materials and labour costs escalation). 

Going forward, PI&M segment will see lower operating profit with the disposal of three properties, whereby contribution will be seen from REIT dividend distribution instead. Based on analysis (assuming distribution of 90% taxable income), taking FY24 as example, the segment will have seen RM53.9 million reduction in operating profit, where the adjusted 2024 PI&M operating profit post REIT will fell to RM124 million.

Hence, post-REIT, FY24 combined operating profit from the Property Development (RM37 million) and Property Investment & Management (RM124 million) segments totaling RM161 million, will just be moderately enough to cover the annual interest cost of RM152 million. As such, positive contributions from the Engineering & Construction (E&C) segment remain crucial to achieving a more comfortable interest coverage ratio, where orderbook replenishment will be a key area of focus.

Table 3: WCT’s revenue and profit trends

Interest coverage ratio at approx. 1.29 times post REIT, still sits in borderline zone 

Excluding the one-off remeasurement effect, the FY2024 interest coverage ratio (interest paid and perpetual securities distribution) stood at 0.9 times, indicating that operating profit fell slightly short of covering interest obligations. However, the expected RM66 million in annual interest savings from deleveraging is projected to improve the post-REIT interest coverage ratio back to a much barely passable 1.29 times.

Table 4: Interest expenses and interest coverage ratio

Risks

In the case of WCT, there is a tangible risk in terms of its depleting orderbook. If WCT is unable to secure new orders within this year or next year (2026), the repercussion will be felt in their revenue figures from latter half of 2027 onwards, undermining its bottom line.

In addition, interest coverage ratio is still at a borderline zone, which needs to be watched very closely. With just a 1.29 times interest coverage, any decline in operating income or increase in interest expenses could result in coverage falling below 1.0x, where WCT will need to rely on debt to service financing costs, snowballing the already elevated debt level.

Our view

WCT is planning to issue a 3-year bond with an indicative yield of 5.55%, targeted for end-June (subject to market conditions). The expected issuance size is between RM100 million to RM150 million. Given that the bond tenure (3Y) extends beyond the current E&C orderbook contribution timeline (approx. 2.4 years), we are adopting a more cautious stance on this particular issuance. This issuance would be more appropriate for investors with a high risk appetite who are confident in WCT’s ability to replenish its orderbook.

In comparison, we hold a more favourable view of Solarvest’s upcoming 3-year bond, offering a 5.45% indicative yield (IPG). While the yield is slightly lower, the issuer carries a lower credit risk than WCT’s 3-year bond, presenting a more balance risk-return profile.

Please refer to the Solarvest article here: Solarvest’s new sukuk issuance attractively priced at 5.45%.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report holds an NIL position in the abovementioned securities.