MARC ASSIGnS PRELIMINARY RATING OF MARC-2IS TO BINA DARULAMAN'S RM100.0 MILLION ISLAMIC CP PROGRAMME; OUTLOOK STABLE

MARC has assigned a preliminary short-term rating of MARC-2_IS to Bina Darulaman Berhad’s (BDB) proposed RM100.0 million Islamic Commercial Papers (ICP) Programme. The outlook for the rating is stable.

The rating primarily reflects BDB’s moderate business and financial profile, characterised by improving profitability on the back of increased property development activities and a secured road maintenance contract. The rating is moderated by the prevailing challenging prospects for the domestic property sector, particularly in Kedah where the bulk of its projects is concentrated.

BDB is an investment holding company majority-owned by Perbadanan Kemajuan Negeri Kedah (PKNK), a statutory body established by the Kedah state government to undertake economic development in the state, among other objectives. BDB’s four main business segments, namely property development, road building and quarrying, construction, and tourism and hospitality, have been mostly in Kedah, where it has established a track record in township development with notable township projects such as Bandar Darulaman in Jitra and Darulaman Utama in Kuala Ketil, as well as Darulaman Perdana in Sungai Petani. 

MARC notes, however, that the group’s recent property launches, particularly in Bandar Darulaman and Darulaman Perdana, have achieved slower take-up rates for high-end residential developments which have dragged overall sales. The average take-up rate of projects launched in 2016 stood at a modest 25.7% as at end-January 2017, although this is higher than the average take-up rate of 12.1% for Kedah for 9M2016. In the near term, MARC expects property sales for BDB to remain challenging, particularly in the high-end segment. In view of this, the group is strengthening its focus on the affordable housing segment, where demand has been more resilient, with planned development of five projects with a gross development value (GDV) of RM383.3 million in 2017. The GDV for BDB’s current launched projects is about RM275.1 million.  The group is expanding outside the Kedah state to mitigate project concentration risk and has undertaken a housing project in Perak.

MARC notes that a three-year maintenance contract secured from the Kedah state government in June 2015 to maintain roads in the state provides a stable revenue stream, accounting for about 20% of the group’s consolidated revenue in 2016. While the contract expires in 2018, renewal risk is reduced by BDB’s relationship with the state government. The road and quarry division also undertakes quarrying, primarily for external sales and for its own consumption. The group’s construction division has a modest outstanding order book of RM208.2 million as at end-2016, mainly from housing projects and a water treatment plant. Of its business segments, the tourism and hospitality segment has been a drag on BDB’s financial performance in recent years. This is attributed partly to refurbishment work that has disrupted its operations. In addition, tight competition from the smaller hotel operators within the region has also been a factor.

For 2016, BDB’s consolidated revenue and pre-tax profit increased by 46.6% and 28.3% y-o-y to RM356.6 million and RM52.3 million respectively, due largely to the enhanced contribution from the property development and road and quarrying divisions. Land disposal for RM65.0 million and revenue from state roads maintenance of RM70 million supported the significant boost in group revenue for 2016. Overall, BDB’s operating profit for 2016 rose by 63.1% y-o-y in tandem with its revenue increase, resulting in an OPBITDA margin of 16.2% while OPBITDA interest cover improved to 2.95x (2015: 2.49x).

For 1Q2017, BDB’s revenue was higher y-o-y at RM63.0 million (1Q2016: RM46.7 million) due primarily to income from the construction of the Pokok Sena water treatment plant and affordable PPR housing development project in Ayer Hitam. Operating profit remained stable at RM1.1 million (1Q2016: RM 1.1 million). As at end-1Q2017, BDB’s borrowings declined to RM116.7 million (end-2016: RM355.2 million), following the settlement of KUIN project financing in February 2017. The settlement led to the group’s DE ratio improving to 0.22 times (end-2016: 0.66 times). Relative to its current outstanding debt, its liquidity position is adequate with cash balances of RM45.8 million, translating into cash-debt cover of 39%. BDB’s financial flexibility stems from its sizeable land bank of 2,034.5 acres in Kedah. As a public-listed Kedah state government-linked company, BDB also has access to the equity capital market.

The full drawdown of the proposed RM100.0 million ICP programme will potentially increase the holding company’s leverage to 0.30 times, which in MARC’s view is well within the rating band. The proceeds are expected to be utilised for BDB’s working capital requirements.

The stable outlook incorporates MARC’s expectations that BDB would maintain its credit metrics that are commensurate with the current rating band. However, an increase in leverage and/or weakening earnings prospects in its core businesses could result in downward rating pressure.

Contacts:          Cheah Wan Kin, +603-2717 2932/ wankin@marc.com.my; Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my

June 14, 2017