MARC has affirmed its ratings on Berjaya Land Berhad’s (BLand) outstanding RM500.0 million Medium-Term Notes (MTN) Programme guaranteed by Danajamin Nasional Berhad (Danajamin) at AAA(fg) and RM150.0 million MTN Programme guaranteed by OCBC Bank (Malaysia) Berhad (OCBC Malaysia) at AAA(bg). The outlook for the ratings is stable.
The affirmed ratings reflect the unconditional and irrevocable guarantees provided by Danajamin and OCBC Malaysia respectively. Danajamin carries a financial insurer rating and counterparty rating of AAA/Stable while OCBC Malaysia has a public information rating of AAA/Stable from MARC.
BLand is an intermediate investment holding company of Berjaya Group with interests in gaming, motors, properties, hotels and recreation. Its standalone credit profile remains weighed down by the challenging prospects for the domestic property industry, its sizeable debt and modest earnings from its non-gaming subsidiaries. BLand continues to rely on asset disposals to meet its principal financial obligations. The sale of its China Great Mall project in Beijing during financial year ended April 30, 2016 (FY2016) for RM680.9 million and half of its 100% stake in Berjaya Kyoto Development Pte Ltd, the developer of Four Seasons Hotel and Residence in Kyoto, for RM404.5 million enabled BLand to repay a net debt of RM323.2 million during the period. With the repayment, group borrowings declined to RM3.6 billion, resulting in a lower debt-to-equity ratio of 0.44 times as at end-July 2016.
MARC notes that despite the success of BLand’s hotel development in Kyoto, its other foreign property projects remain exposed to cross-border risks. The group’s mixed development project in Ho Chi Minh City, Vietnam has encountered delays due to regulatory approvals in the country. Its Jeju Island development project in South Korea has been suspended, following which BLand has managed to recover RM374.5 million through the sale of land to its local joint venture partner. It expects to recover the remaining RM646.0 million of its initial investment in the Jeju Island project through legal proceedings. The cross-border risks notwithstanding, BLand’s overseas projects would continue to provide the group with opportunities to realise meaningful gain on investments.
MARC observes that BLand's domestic property developments have remained subdued, with its focus remaining on ongoing projects in Bukit Jalil, Kuala Lumpur, and Georgetown, Penang. These projects have combined contracted sales of RM366 million and are expected to be completed in FY2018. The performance of its hotel, club and recreation divisions has remained weak despite some improvement in 1QFY2017.
BLand’s consolidated financial profile remains dominated by subsidiary Berjaya Toto Berhad (BToto), which accounted for about 95% of operating profit for 1QFY2017. BToto’s key subsidiaries are Sports Toto Malaysia Sdn Bhd (Sports Toto), a leading operator of number forecast operations (NFO) in Malaysia, and H.R. Owen Ltd, a motor retailing company in UK. Sports Toto’s significant cash generation ability, with cash flow from operations averaging around RM350 million per annum over the last five years, underpins MARC’s AA-/Stable rating on the gaming company’s RM800 million MTN programme. The motor retailing subsidiary continues to face low margins, with contributions to operating profit remaining low.
For 1QFY2017, BLand recorded higher y-o-y revenue of RM1.55 billion but weaker operating profit of RM115.6 million (1QFY2016: RM1.50 billion; RM145.1 million). The revenue improvement was mainly due to higher sales recorded by H.R. Owen Ltd in conjunction with its introduction of new car models. However, higher operating expenses and lower progress billings from property development operations reduced BLand’s profitability in 1QFY2017.
At the holding company level, BLand continues to derive the bulk of its dividend income from BToto amounting to RM89.2 million, or 64% of the total of RM139.6 million in FY2016. This was sufficient to meet interest payments on the holding company debt of RM1.2 billion, or 35% of the group’s consolidated debt of RM3.6 billion. CFO interest cover stood at 4.69 times at the consolidated level and 1.77 times at the holding company level. The rated RM650 million MTN programme is fully drawn down, with the first repayment of RM275.0 million scheduled in December 2017, which could be rolled over under the programme.
Notwithstanding BLand’s standalone risk factors, noteholders are insulated from the downside risk related to the credit profile of BLand by the guarantees provided by Danajamin and OCBC Malaysia. Any change in the supported ratings or rating outlook would be primarily driven by changes in the credit strength of the guarantors.