RAM Ratings reaffirms AA3/P1 ratings of PKNS’s sukuk

Published on 30 October 2014

RAM Ratings has reaffirmed the AA3/Stable/P1 ratings of Perbadanan Kemajuan Negeri Selangor’s (PKNS or the Agency) Islamic debt securities, on account of the Agency’s robust financial profile and commendable performance despite weaker market conditions and significant changes in key management.

PKNS plays an important role in the Selangor State Government’s (SSG) property development and socio-economic agendas. Unlike other property developers, the Agency has the social obligation to provide low-cost and affordable homes. As such, it has been a beneficiary of inexpensive land, grants and soft loans on favourable repayment terms from the SSG in the past. On the other hand, this also means that PKNS’s ability to maximise the development potential of its land bank is, to some extent, constrained by its public policy role. Based on our rating methodology for government-linked entities, PKNS’ public policy role is considered important while its relationship with the government is deemed strong. Despite the Agency being financially self sufficient, we envisage a moderate likelihood of extraordinary support from the SSG should the need arise.

Despite a substantial increase in its debt level to RM625.22 million as at end-July 2014, PKNS’s balance sheet remained strong, with gearing and net gearing ratios of a respective 0.12 and 0.06 times. The Agency further displayed robust annualised operating profit before depreciation, interest and tax (OPBDIT) debt coverage metrics of 0.37 times for 7M FY Dec 2014. PKNS also has considerable financial flexibility, underscored by its vast land bank of about 9,000 acres as at end-December 2013. “In the immediate term, PKNS may incur significant debts to finance working capital for high-end developments and land acquisitions,” said Thong Mun Wai, RAM’s Head of Agribusiness, Real Estate and Construction Ratings. “Depending on the level of debts, the Agency’s gearing could rise to 0.30 times, albeit still robust. However, its OPBDIT debt coverage ratio could turn moderate, estimated to range between 0.15 and 0.25 times,” he added.

Besides hefty debt-funded working capital requirements, we are concerned about the high execution and demand risks arising from concurrent integrated developments. PKNS expects to start development on several large-scale mixed-commercial developments with GDV of about RM4 billion from 2015 onwards.

The Agency has seen significant changes to its key senior management this year, including the appointment of a new general manager. These changes had coincided with a period of political turmoil within the SSG. Although the situation has since been resolved and a new Menteri Besar has been appointed (who is also the new chairman of PKNS), this does not preclude the possibility of further changes in PKNS’s management or strategic direction. That said, we have not observed any significant deterioration or disruption in the Agency’s core business thus far, despite the major changes it has experienced.

PKNS’s Islamic debt securities consist of a RM300 million Islamic Commercial Papers Programme (2013/2020) and RM700 million Islamic Medium-Term Notes Programme (2013/2033) with a combined limit of RM700 million.

Media contact
Ben Inn
(603) 7628 1024
ben@ram.com.my