RAM Ratings assigns final A2(s)/P1(s) ratings to ICP/IMTN to be issued by Sunway's funding vehicle

Published on 09 October 2014

RAM Ratings has assigned final ratings of A2(s)/Stable/P1(s) to Sunway Treasury Sukuk Sdn Bhd’s proposed ICP/IMTN Programme of up to RM2.0 billion (2014/2021) (proposed ICP/IMTN). Sunway Treasury Sukuk Sdn Bhd is a funding vehicle wholly owned by Sunway Treasury Sdn Bhd. The proposed ICP/IMTN will be backed by an irrevocable and unconditional Al-Kafalah guarantee from Sunway Berhad (Sunway or the Group). Therefore, the enhanced ratings reflect the credit profile of the Group. At the same time, we have reaffirmed the A2/Stable/P1 ratings of Sunway’s existing RM2.0 billion CP/MTN facility (2013/2020).
The ratings reflect Sunway’s solid business profile as a large-scale and vertically-integrated property-cum-construction player, with a strong presence in the entire chain of the property sector. This includes its partial ownership of Sunway Real Estate Investment Trust (Sunway REIT), through which it earns fairly-consistent dividends and management fees. Despite a slower property sector last year, Sunway maintained its unbilled sales at a robust RM2.4 billion as of June 2014. Sizeable new construction contracts also enabled the Group to build up an outstanding order book of RM3.5 billion as of the same date. This will provide the Group revenue and earnings support over the next few years, and tide it over the softer property market.
The ratings also take into consideration Sunway’s fairly-diversified business model, anchored by property development (50%-60% of core pre-tax profit), with property investment (20%-25%), construction (12%-14%) and trade and manufacturing and quarry operations (collectively 10%-12%) making up the rest of its businesses. Despite the proposed listing of its construction business, we take comfort that the Group will retain control, with an estimated stake of 51%-55% in the listed construction group. Going forward, the Group’s large land bank of over 3,300 acres will sustain it over the long term. We further note Sunway’s proven ability to form joint ventures with land owners and secure land on a deferred-payment basis, which minimise its land-holding costs and allows flexibility in timing property launches.
The ratings are, however, moderated by Sunway’s heavy debt load, which stood at RM3.2 billion as at end-June 2014. Furthermore, a substantial 64% of its debt was short-term in nature, exposing it to interest-rate and rollover risks. To fund the development of its investment properties and projects, the Group’s debt is expected to rise to RM4-RM4.5 billion over the next 2-3 years. The impact of this debt level will, nevertheless, be cushioned by its practice of maintaining a large cash coffer as well as its more robust capital base following its rights issue last year. We expect Sunway’s gearing and net gearing ratios to hover at 0.6-0.7 times and 0.4-0.5 times, respectively, over the next 2-3 years. Its corresponding operating cashflow (OCF) debt coverage ratio is projected to be adequate at around 0.15 times (OCF net debt cover: 0.2-0.3 times).
The ratings are also constrained by Sunway’s exposure to the cyclicality of the property and construction sectors. To this end, we have a negative outlook on the residential property sector in view of the slower property market and our expectation of a single-digit contraction in transaction volumes this year. This follows cooling initiatives announced under and post-Budget 2014, as well as the recent interest-rate hike. While the Group’s fairly-diversified businesses will serve as a buffer, its pre-tax profit is still deemed to be susceptible to the fate of the property sector, given the substantial contribution from its property-development segment.
Media contact
Karin Koh
(603) 7628 1174
karin@ram.com.my