RAM Ratings assigns A2/P1 ratings to Sunway’s proposed debt issue

Published on 30 October 2013

RAM Ratings has assigned A2/Stable/P1 ratings to Sunway Berhad’s (Sunway or the Group) proposed CP/MTN Programme of up to RM2.0 billion (2013/2020). At the same time, we have reaffirmed the following ratings of Sunway’s existing RM500 million CP/MTN facility:

Type

Ratings

 RM500 million CP/MTN, of which:

i)   Tranche 1 – Up to RM100 million

ii)  Tranche 2 – Up to RM100 million

iii) RM300 million is unguaranteed

AAA(bg)/Stable/P1

AA2(bg)/Stable/P1

A2/Stable/P1

Sunway’s A2/Stable/P1 ratings reflect the Group’s solid business profile, underscored by its large-scale and vertically integrated business model, and its diversified revenue and earnings base. The Group had accumulated RM2.2 billion of unbilled sales and an outstanding construction order book of RM3.88 billion as at end-June 2013 – a testament of its solid branding and established standing within the construction and property sectors. This will sustain the Group’s profit performance over the next 2-3 years. Notably, the Group’s property-investment segment – which includes rental income from its investment properties and management fees from Sunway Real Estate Investment Trust – made up 20%-25% of its core pre-tax profit in FY Dec 2012 and 1H FY Dec 2013. Along with dividends from Sunway REIT, these relatively stable businesses provide the Group with diversity and stability of earnings and cashflow, and mitigate its exposure to the cyclical nature of the property and construction industries.

Going forward, Sunway’s vast land bank will see it through the medium to long term. Located in fairly prime suburban areas in the Klang Valley, Johor, Penang, Perak, Singapore and China, the potential gross development value of its 3,834-acre land bank stood at about RM56 billion.

The Group’s ratings are, however, constrained by its relatively high gross borrowings. Sunway carried RM3.02 billion of debts as at end-June 2013, translating into adjusted gearing and net gearing ratios of 0.85 times and 0.61 times, respectively. However, after taking into account the Group’s rights issue which was completed in August 2013, its proforma adjusted gearing ratio came up to 0.72 times as of the same date, while its adjusted net gearing ratio stood at a comfortable 0.37 times as the Group continued to retain a substantial cash pile for active capital and cash management. Its operating profit before depreciation, interest and tax (OPBDIT) debt cover and operating cashflow debt cover (OCFDC) came up to a respective 0.15 times and 0.07 times (annualised from 1H FY Dec 2013). The ongoing construction of several investment properties is expected to keep Sunway’s debt at a higher-than-expected level of close to RM4 billion in the next 2 years, while its OCFDC is projected to stay at around 0.1 times (OCFDC on a net debt basis: 0.16-0.21 times). This is, however, balanced by its strong business profile.

Going forward, RAM remains cautious over the property industry’s outlook, more so in view of the cooling measures unveiled in the recent Budget 2014 that may negatively affect the residential property sector. At the same time, the office and retail sectors in the Klang Valley continue to face an oversupply. While property players may witness a slowdown in residential property sales in the coming months, this is likely to be temporary as the demand for residential properties remains supported by the still-positive domestic economic growth, the nation’s healthy demographics, rural-urban migration and a low unemployment rate.

Meanwhile, the respective AAA(bg) and AA2(bg) ratings of Tranches 1 and 2 reflect the unconditional and irrevocable bank guarantees (BGs) extended by OCBC Bank (Malaysia) Berhad and RHB Bank Berhad, respectively, which are effective until 15 November 2015. Any subsequent issues drawn from the programme will carry Sunway’s corporate credit ratings (CCRs).