FW: RAM Ratings reaffirms AA2 rating of UEM's sukuk

 

Published on 06 Feb 2018.

RAM Ratings has reaffirmed the AA2/stable rating of UEM Group Berhad’s (UEM or the Group) IMTN Programme of up to RM2.2 billion (2012/2042), issued through funding vehicle, United Growth Berhad (United Growth). The rating continues to reflect the Group’s diverse businesses and the sturdy positions of its key operating companies, while incorporating expectations of government support in times of need. 

Being wholly owned by Khazanah Nasional Berhad – the Government’s investment-holding arm – UEM has a strong corporate lineage. The Group is viewed as playing an important role, underpinned by its holdings of concessions in strategic local tolled roads and large tracts of land in Iskandar Puteri – a component of the Government’s Iskandar Malaysia economic corridor. The likelihood of government support for the Group in times of need is deemed moderately high, as defined in RAM’s criteria for rating government-linked entities.   

UEM’s business profile is diversified, core segments comprising expressways, engineering and construction, township and property development, and asset and facility management (AFM). Stable earnings from the Group’s local expressways will continue to provide a buffer against cyclical challenges. Further, UEM’s key operating companies have strong business profiles, underscored by concessions for strategically aligned local highways and their leading positions in the property, AFM and cement industries. 

The Group’s stand-alone credit profile is, nevertheless, moderated by its substantially lower profit in FY Dec 2016 (-77% y-o-y). This was due to the losses sustained by its construction arm and its Indonesian highway asset as well as reduced profits at its AFM, property and cement businesses. This, along with high debt levels, had kept UEM’s adjusted funds from operations debt cover (FFODC) at less than 0.10 times in FY Dec 2016. 

In 1H FY Dec 2017, however, the Group registered a stronger pre-tax profit (+55% y-o-y), largely attributable to the stronger profit showing of its property and AFM operations which offset the weak bottom line of its cement business. This coupled with dividends received from its key toll-road joint venture – PLUS Malaysia Berhad (PLUS) – towards the end of 2017, is envisaged to substantially improve the Group’s full-year profit performance. UEM’s ability to sustain stronger profits could remain challenged by tough property and cement market conditions. On a lighter note, the Group’s FFODC may improve in fiscal 2018 if its debt load is pared down with proceeds anticipated from the disposal of its stake in Opus International Consultants Ltd, the completion of its first Australian property project (from 4Q 2018) and the disposal of lands in Johor. 

The rating is also moderated by the regulatory risks relating to toll-road assets. Although the Group’s local toll roads had been due for a rate hike in January 2016, the Government had decided against rate increases for these expressways in 2016 and 2017. In addition, toll collection at three of PMB’s toll plazas on the North-South Expressway was discontinued on 1 January 2018 as announced in Budget 2018. It is understood that PLUS is in discussion with the Government on the compensation for the tolls surrendered. In the meantime, principal repayments on the heavy debt load residing at PLUS’s subsidiary, which started in January 2017, may affect future distributions to the Group.

United Growth was set up to raise the IMTN, and is wholly owned by UEM. By virtue of an irrevocable and unconditional purchase undertaking, the sukuk holders are effectively exposed to UEM’s credit risk, as reflected in the rating of the IMTN.

 

Analytical contact
Karin Koh, CFA
(603) 7628 1174
karin@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my