RAM Ratings reaffirms AA3/P1 ratings of Dar Al Arkan Real Estate Development Company

Published on 30 August 2013

RAM Ratings has reaffirmed the corporate credit ratings of Dar Al-Arkan Real Estate Development Company (Dar Al-Arkan or the Group) at AA3/stable/P1. Dar Al-Arkan is a real estate developer based in the Kingdom of Saudi Arabia.
The ratings reflect the Group’s strong market position in the Saudi Arabian property sector; it is one of the largest real estate developers in the Kingdom. Since its inception, Dar Al-Arkan has delivered more than 10 million sqm of developed land and 15,000 residential and commercial units in the Kingdom, highlighting its solid track record. While the scarcity of prime land and the sale of less developed parcels have squeezed margins over the years, the Group’s gross profit margins have remained strong at around 40%. Elsewhere, Dar Al Arkan’s large tracts of prime land in the Kingdom’s main cities – Riyadh, Jeddah, Dammam and Medinah – which carried a net book value of SR15.4 billion as at end-December 2012, are envisaged to sustain its operations over the medium term.
Prospects for Saudi Arabia’s property sector remain bright, underpinned by steady population growth and healthy demographics, economic growth and the introduction of mortgage-finance laws. RAM expects the the sector’s long-term prospects and Dar Al Arkan’s established track record to continue to augur well for its performance. Nonetheless, the Group’s revenue and profits have been on a declining trend for the past 4 years, mainly due to a slowdown in its residential property development activities.
The ratings are, however, moderated by Dar Al-Arkan’s high debt level despite the substantial repayment. Moving forward, its debt load is expected to be maintained at around SR5 billion. In spite of a high debt level, the Group’s gearing is envisaged to stay manageable at below 0.4 times. Its operating profit before depreciation, interest and tax debt coverage and funds from operations debt coverage ratio are projected to remain at around 0.2 times over the next 5 years, a level considered modest for its rating.
Meanwhile, Dar Al-Arkan is vulnerable to the inherently cyclical nature of the property sector, given that the Group’s activities are concentrated in land sales, which tend to be lumpy. Any slowdown in Saudi Arabia’s economy or property sector is expected to have an adverse impact on the Group’s financial performance, although we note the strong fundamentals of the sector over the intermediate term. That said, Dar Al-Arkan still faces geographical-concentration risk because its activities are based entirely in Saudi Arabia. In addition, the Kingdom is exposed to the geopolitical risks faced by countries in the Gulf region. While we note that Saudi Arabia has remained relatively sheltered from the effects of regional conflicts to date, the threat of unrest cannot be discounted.

Media contact
Jason Tan
(603) 7628 1030
jasontan@ram.com.my