MARC AFFIRMS AAAIS(fg) RATING ON 1 WARISAN SDN BHD’S RM170 MILLION IMTN PROGRAMME

May 30, 2012 -

MARC has affirmed its rating of AAAIS(fg) on 1 Warisan Sdn Bhd’s (1 Warisan) RM170.0 million seven-year Islamic Medium Term Notes (IMTN) Programme with a stable outlook. The affirmed rating and outlook are underpinned by an unconditional and irrevocable Kafalah Guarantee provided by Danajamin Nasional Berhad (Danajamin) in relation to the IMTN Programme. MARC currently rates Danajamin’s financial strength as AAA/stable on the basis of its important role as Malaysia’s first and sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base and ample liquidity.

Wholly-owned by Gema Padu Sdn Bhd, 1 Warisan was created as a funding vehicle to facilitate the issuance of the notes under the rated programme. As at February 27, 2012, RM100 million notes under the programme have been issued, though only RM53.9 million has been utilised so far with the balance retained in the disbursement account. The funds had been used to finance Gema Padu’s property development activities, including the redemption of some land parcels and three phases in its signature development, the 600-acre Kota Warisan township as well as two smaller adjacent property developments covering about 45 acres and nine acres respectively. All three developments benefit from close proximity to major highways and the Express Rail Link to Kuala Lumpur International Airport (KLIA).

MARC observes that since the initial rating exercise, Gema Padu has had only two launches, both of which were in respect of its smaller property developments. It achieved respective take-up rates of 94% and a moderate 60% for the launch of the 82 units of double-storey shop offices and one block of 245 units of service apartments with gross development value (GDV) of RM58.2 million and RM63.1 million respectively. MARC understands that Gema Padu’s development plans for the Kota Warisan development and 45-acre Damai Gemilang development have been changed. The group now intends to sell a major portion of the land held for future developments. To date, 12 acres from Damai Gemilang project have been sold for RM20.9 million (RM40 psf) and the group is negotiating to sell another 21 acres. Proceeds from the land parcel sales in Damai Gemilang project will be used to reduce Gema Padu’s borrowings including the RM10.5 million drawn down under the IMTN programme for the project. It will also dispose land parcels in Kota Warisan, which includes the 87 acres that were originally earmarked for residential and retail developments and financed under the IMTN programme. No drawdown from the disbursement account was made to fund development activities on Kota Warisan’s three projects. MARC is of the view that the company’s decision to monetise its land would help improve liquidity.

MARC understands that the construction progress of Gema Padu’s nine-acre Mutiara Warisan project is behind schedule by almost nine months due to delays in obtaining approvals from the local authorities, including for the revised building plan. The delays could give rise to liquidated damages.

Based on the unaudited nine-month period for financial year 2011 (9MFY2011), Gema Padu posted lower revenue of RM72.2 million (FY2010: RM83.3 million) and a sharply lower pre-tax profit of RM1.4 million (FY2010: RM12.1 million). Contribution from property development to revenue has continued to decline to 52% of total revenue for 9MFY2011 (FY2010: 58%; FY2009: 71%) on the back of fewer launches. Higher revenue from Gema Padu’s smaller business segments, including the low-margin retailing operations (fuel and groceries), machinery rentals and brick sales, have compensated somewhat for the lower property developments earnings. The lower-than-expected earnings and negative cash flow from operations in 9MFY2011 are partly due to the majority of its projects being at the early stages of development and consequently, face slower revenue recognition at these stages, in addition to rising costs.

Gema Padu’s stand-alone credit profile has been affected by its weak earnings in 9MFY2011 and negative operating cash flow of RM27.9 million. Its cash and cash equivalent holdings of RM37.1 million as at end-September 2011 was principally generated from borrowings. Its cash outflow from the acquisition of the developer’s nine-acre Mutiara Warisan development amounted to RM15.0 million, of which RM6.0 million was financed by the IMTN programme. As a result of the RM100 million drawdown under the rated programme, Gema Padu’s debt-to-equity ratio rose to 1.88 times. However, taking into account the undisbursed cash held in disbursement account, the net debt-to-equity ratio would be 1.34 times. The company met its April 2012 profit payment of RM2.08 million and intends to pare down its borrowings substantially in the subsequent months with proceeds from the land sales. MARC views the land sales as a critical driver for the maintenance of an adequate debt service capacity on the part of Gema Padu in coming months amid a challenging property market outlook.

Overall, noteholders under the IMTN programme are insulated from any downside risk in relation to Gema Padu’s credit profile by the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook would be primarily driven by changes in Danajamin’s credit strength.


Contacts:
Goh Shu Yuan, +603-2082 2268/ shuyuan@marc.com.my
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my