RAM Ratings reaffirms S P Setia's rating

Published on 09 January 2012
RAM Ratings has reaffirmed the AA3 rating of S P Setia Berhad’s (“S P Setia” or “the Group”) RM500 million Nominal Value of 2% Redeemable Serial Bonds (“Bonds”) with 168,151,302 Detachable Warrants (2007/2012); the long-term rating has a stable outlook. The outstanding amount of the Bonds stood at RM250 million presently.
The rating reflects S P Setia’s strong business profile as a prominent property developer in Malaysia. S P Setia boasts strong diversification in terms of product range and geographical presence. The Group has a proven ability to offer a wide array of properties with different price tags to cater to different segments of the market, with most of its offerings achieving full take-ups within 1–2 years. “S P Setia’s strong branding and product innovation underscore its robust revenue generation capability. We believe these factors, guided by the Group’s capable management team will continue to fuel its operating performance,” underlines Shahina Azura Halip, RAM Ratings’ Head of Real Estate and Construction Ratings. The Group’s record level of unbilled sales of RM2.83 billion as at end-October 2011 should ensure some earnings stability over the next few years.

Aside from its large stable of ongoing projects, S P Setia has over 5,500 acres of undeveloped land in various prime locations within the Klang Valley, Penang and Johor, which are expected to keep it busy for at least another decade. The Group also features a robust liquidity profile, with large holdings of cash and cash equivalents of some RM1.44 billion against RM236.17 million of short-term debts as at end-October 2011.

On the flip side, the rating is moderated by the Group’s projected borrowing requirements which are expected to peak at close to RM3.3 billion over the next 1-2 years. The higher debt load is primarily to fund its recent land acquisitions which came close to RM1.9 billion. At its weakest, its operating profit before depreciation, interest and tax debt cover and funds from operations debt cover are projected to remain thin at a respective 0.11 times and 0.08 times. However, the weaker-than-average financial profile is largely moderated by RAM Ratings’ view that the projected metrics are unlikely to fully materialise. As seen in the past, the Group has consistently demonstrated its ability to pace its borrowing requirements and manage its capital structure through other fund-raising alternatives. This is evinced by its successful share placement last year, which raised some RM885 million. Additionally, the Group has the flexibility of disposing of land and investment properties to generate cash, when required. “That said, we highlight that should the Group’s debt load stay elevated for a prolonged period, suggesting an increased tolerance for financial risk, and/or no improvement is noted in its debt-protection measures over the next 2 years, its ratings may face downward pressure,” cautions Shahina.

Additionally, there is some degree of uncertainty in relation to the role of S P Setia’s president and chief executive officer, Tan Sri Liew Kee Sin, following Permodalan Nasional Berhad’s (“PNB”) takeover bid in September 2011. Although a proposed agreement to govern the incentives and rights of the management team is being ironed out, the exact terms and conditions remain unknown. We opine that the Group’s longer-term business profile may suffer negative implications should there be significant management changes or if PNB’s involvement and control over the Group extend beyond board representation.

Media contact
Chan Yin Huei
(603) 7628 1180
yinhuei@ram.com.my