MARC has affirmed its AAA(bg) and MARC-1(bg) ratings on Mega Palm Sdn Bhd's (Mega Palm) Bank Guaranteed Medium Term Notes (BG MTN) of up to RM70 million and Bank Guaranteed Commercial Papers (BG CP) of up to RM80 million respectively

MARC has affirmed its AAA(bg) and MARC-1(bg) ratings on Mega Palm Sdn Bhd's (Mega Palm) Bank Guaranteed Medium Term Notes (BG MTN) of up to RM70 million and Bank Guaranteed Commercial Papers (BG CP) of up to RM80 million respectively. The outlook for the ratings is stable.The rating action affects the outstanding BG MTN of RM10 million and BG CP of RM40 million.

The affirmed rating and stable outlook are premised on MARC's ratings of AAA/MARC-1 on Malayan Banking Berhad (Maybank) which has provided an unconditional and irrevocable guarantee on the MTN and CP. Maybank's ratings reflect the bank's leading market position in Malaysia as the country's largest commercial bank in terms of asset size with sound asset quality, resilient recurring earnings base and restored capital strength.

Mega Palm, a member company of the property developer Country Heights Holdings Berhad (CHHB) group, is developing the 196-acre Country Heights Damansara (CHD) project located along Jalan Damansara in Kuala Lumpur. Consisting of sale of bungalow lots, a limited number of bungalows and land parcels, the project which commenced in 2001 has achieved 70%, or realised RM669 million of total gross development value (GDV) of RM956.1 million. MARC notes that sales have remained sluggish with only six bungalow lots sold in the year under review as opposed to 19 in the previous year. As at June 30, 2012, CHD has a remaining 19 bungalow lots from an initial total 333 for sale and two bungalow units out of nine. The company, which has 19.8 acres remaining, did not undertake any large land parcel sales in the year.

MARC notes that revenue and pre-tax profit for the financial year ending December 31, 2011 (FY2011) fell sharply to RM16.2 million (FY2010: RM63.1 million) and RM2.3 million (FY2010: RM19.0 million) as a result of the weak sales performance. Consequently, cash flow from operations (CFO) decreased to RM23.0 million in FY2011 (FY2010: RM42.4 million). Mega Palm repaid borrowings of RM37 million in FY2011, which reduced cash and cash equivalents to RM20.7 million (FY2010: RM44.3 million). MARC understands that the company is negotiating to sell 6.4 acres for RM31.1 million, the proceeds of which are expected to be utilised towards meeting the redemption of the outstanding RM10 million BG MTN and RM40 million BG CP under the rated programme which will expire in May 2013. MARC views that the weakening property market sentiment could pose a challenge to the company's land sales.

Nonetheless, BG MTN and BG CP noteholders are insulated from downside risks in relation to Mega Palm's credit profile by virtue of the guarantees provided by Maybank. 

Contacts: Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my; Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.

October 11, 2012