RAM Ratings reaffirms rating of sukuk issued by UEM’s funding vehicle

Published on 31 December 2014

RAM Ratings has reaffirmed the AA2/stable rating of United Growth Berhad’s Islamic MTN Programme of up to RM2.2 billion (2012/2042). United Growth – a special-purpose company set up to raise the IMTN – is wholly owned by UEM Group Berhad (the Group). Through an irrevocable and unconditional purchase undertaking between United Growth and UEM, the sukukholders are effectively exposed to UEM’s senior unsecured credit risk. As such, the rating of the IMTN reflects the credit risk of UEM.

The rating is supported by UEM’s favourable corporate lineage given that it is wholly owned by Khazanah Nasional Berhad, the investment arm of the Malaysian Government. We deem UEM to be important to the Government in view of the Group’s stakes in strategic tolled roads and vast land holdings in Nusajaya (part of Iskandar Malaysia, an important economic corridor). Based on RAM’s methodology on government-linked entities, we expect a moderately high likelihood of support. Notwithstanding being a government linked corporate entity and wholly owned by Khazanah, UEM is expected to operate independently and provide the required return on investment to its sole shareholder, as has happened in the past.

UEM enjoys a diversified business profile, underpinned by its 4 core businesses of expressways, engineering and construction, property development, and asset and facility management (AFM). While the construction segment dominates its top line, contributions from non-construction businesses account for the bulk of its pre-tax profits. The stable performance of its expressways and AFM divisions will help mitigate the Group’s exposure to the cyclical natures of the construction and property sectors. Additionally, its expressways, property development and AFM segments have strong business profiles.

Despite a debt burden of RM4.80 billion as at end-June 2014, UEM displays a strong balance sheet, with respective gearing and net gearing ratios of 0.48 and 0.08 (including money-market investments) times. While the Group’s funds from operations (FFO) debt coverage is deemed adequate, its large reserves of cash and money-market investments facilitated an annualised FFO net-debt coverage of above 1 time for 1H FY Dec 2014. UEM also boasts a strong liquidity position, backed by RM4.05 billion of cash reserves (after including money-market investments) against RM633.21 million of short-term debts. Moving forward, we expect the Group’s debt level to increase over the next 2 years, mainly to fund its investments and growth, whilst its balance sheet is anticipated to remain robust. Over the same period, its gearing and net gearing ratios are anticipated to stay below 0.6 and 0.3 times, respectively. The Group’s FFO debt coverage is expected to hover around the mid-teens while its FFO net-debt coverage should remain strong. Nonetheless, we are cautious about any substantial increase in debts or depletion in its huge cash pile to fund the Group’s investments, the plans for which have yet to be firmed up. In such an event, the Group’s current strong financial profile could change abruptly.

Despite its established domestic presence, UEM’s construction business has a less favourable track record given the incidence of construction delays that have led to thinner margins and losses. The segment’s order book had shrunk to RM4.1 billion as at end-June 2014 (end-May 2013: RM5.2 billion), although we do not foresee issues with job replenishment. We opine, however, that UEM is fairly dependent on developments in Nusajaya. Given the general slowdown in the property market and the keener competition within Iskandar Malaysia, the Group’s revenue and earnings could weaken in the medium term. We also expect lower dividends from its toll-road concessions going forward, due to scheduled principal repayments. The Group faces regulatory risks in its domestic and foreign toll-road projects.

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