Bumpy path to profitability

WCE to incur losses in early years of toll operations

WCE Holdings Bhd, which slipped into a Rm34.92mil net loss in the financial year of 2020 (FY20), is not out of the woods yet.

The builder and concessionaire of the 233km West Coast Expressway is likely to face heavy losses ahead as the six remaining sections of the delayed expressway are completed.

This is due to the fact that WCE will no longer be able to capitalise the interest expenses it incurs on the project financing for the completed sections of the expressway that runs from Banting, Selangor to Taiping, Perak.

As a result, the group will have to charge the interest expenses for the completed sections to its profit or loss, dragging down its bottom line.

This is in accordance with MFRS 123 borrowing costs requirement, which states that “an entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete”.

The group’s losses in FY20 was also because of the same reason, as the construction of section five, eight, nine and 10 of the WCE out of the total 11 sections have been completed and opened for toll operations in FY20.

WCE acknowledged this in its latest annual report that it is expected to incur losses in the early years of toll operations, going forward.

“Nevertheless, the commencement of toll operations of the West Coast Expressway is expected to improve the future financial performance of the group in terms of cash flows and is expected to provide the group a stable recurrent income over the concession period,” it said.

IJM Corp Bhd is the single largest shareholder of WCE with a 25.99% stake

To date, the West Coast Expressway is 66% completed and is expected to be completed in 2022, except for a stretch measuring 10km known as Section 7B, which is expected to be completed by June 2024.

The construction of the expressway commenced in 2014 and was initially slated for completion in 2019.

West Coast Expressway is a greenfield highway project with its 50-year concession agreement signed with the government in January 2013. WCE’S 80%-owned subsidiary West Coast Expressway Sdn Bhd is the concessionaire.

Despite the likelihood of losses ahead, the fact that the group has recorded an operational profit in FY20 offers a fresh hope.

In the previous financial year, WCE was bogged down by operational losses primarily due to a Rm14.9mil net loss from a Global Settlement Agreement to resolve several long outstanding land-related issues with a former associate – Talam Transform Bhd.

Main Market-listed Talam’s founder Tan Sri Chan Ah Chye used to be the single largest shareholder of Kumpulan Europlus Bhd (Keuro), which is currently known as WCE.

The idea behind West Coast Expressway was mooted by Chan in the mid-1990s, However, the project was delayed for many years, mainly due Chan’s weak financial standing and Keuro’s weak balance sheet at the height of the Asian Financial Crisis in 1997/98.

With the settlement to Talam has since been completed, this allows WCE to focus on its expressway construction and property development businesses.

Moving forward, WCE’S path to profitability could be rather bumpy.

Its West Coast Expressway is designed to run parallel to PLUS’ North South Expressway (NSE), with the aim to offload some of the traffic from the NSE as well as provide connectivity to towns along the west coast.

However, the 18% discount offered on all PLUS highways, including West Coast Expressway’s “rival” NSE, presents a new and unexpected challenge to WCE.

WCE might be forced to work out a cheaper toll rate than NSE’S rate after the discount, in order to attract highway users and avoid losing out to NSE.

A lower toll rate, while would make the new expressway more competitive than the NSE, it would potentially result in lower toll collection for WCE than previously projected.

PLUS managing director Datuk Azman Ismail has previously forecast in June 2019 that only 5% of 1.7 million daily NSE users will opt for WCE.

The projection was made before PLUS offered the 18% discount for all its highways, beginning Feb 1 this year.

While there could be toll rate differences between the West Coast Expressway and NSE, some users may favour the former considering that certain routes via West Coast Expressway are relatively shorter than NSE.

The construction works of the West Coast Expressway, which hit the brakes due to the Movement Control Order (MCO), have resumed.

“Traffic volume in the opened sections (of the expressway) has also returned to the preMCO levels and as such, we do not expect any long term implications on the business operations,” WCE says in its FY20 annual report.

It also hints that the introduction of a dividend policy for WCE is unlikely anytime soon, at least not before 2022.

“The board will deliberate a dividend policy after the completion of the project and when future operating cash flows can be more clearly determined,” the group says.

Aside from its toll concession business, WCE has an exposure in the property development segment.

The property development activities are carried out by the group’s 40%-owned associate, Radiant Pillar Sdn Bhd and its subsidiary (RPSB Group).

The group’s share of results from RPSB Group has decreased by 31% from to Rm30.4mil in FY20, mainly due to delays in project launches as a result of product adjustments.

“Moving forward, new launches in the pipeline include affordable terrace houses, targeting first time home buyers and young working adults.

“RPSB Group is expected to maintain its performance for the coming financial year on the back of the unbilled sales and satisfactory response from new launches,” said WCE.

“Traffic volume in the opened sections of the expressway has also returned to the pre-mco levels and as such, we do not expect any long term implications on the business operations.” WCE Holdings Bhd