Expect Another Policy Rate Cut by BI; Damac Properties Posts Weaker 1H Earnings Result

15 August 2016

Global Sukuk Markets Weekly

Expect Another Policy Rate Cut by BI; Damac Properties Posts Weaker 1H Earnings Result  

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) index gained 0.32-0.36% to 105.3 and 163.4 respectively, with yields declining 4.7bps to 2.371%. Turkish bank papers continue to rebound on the back of TUFIKA 2/18-4/19 (-24 to -15bps, to 4.51-4.80%) and KFINKK 6/19 (-13bps to 4.59%). DAMACR 4/19 was 6bps wider at 6.56% after it posted a 27% YoY fall in 1H net profit to AED1.94bn (see sovereign/corporate update). On the other hand, oil price rallied back above USD46.97/bbl on renewed hopes of a production freeze, after the Saudi energy minister suggested an informal OPEC meeting to discuss ways to restore oil market stability at the end of September.

¨   Malaysia’s GDP slowed slightly to 4.0% YoY in 2Q from 4.2% in 1Q, exactly in line with economists’ estimates, although June industrial production (IP) surprised on the positive side at 5.3% YoY in June from 2.8% in May. Its current account (CA) surplus narrowed sharply to MYR1.9bn (0.6% of GDP) in 2Q from MYR5.0bn (1.7%) in 1Q. The oil price rally has relieved pressure off Malaysian credit, which was closed at a one-year low of 125.0bps (-7.5bps). On the other hand, Indonesia’s CA deficit came in at USD4.70bn (2.0% of GDP) in 2Q vs. -USD4.67m (2.2%) in 1Q. Bank Indonesia (BI) is expected to cut its policy rate by 25bps in this Friday’s policy meeting (19-Aug), with its CDS trading at 143.5bps (-8.0bps).  Elsewhere, Turkey’s CDS tightened 17.6bps to 243.7bps despite a negative industrial production growth of -1.4% MoM in June and wider CA deficit of USD4.9bn in June.

¨   As part of efforts to attract more fresh foreign money and further develop the domestic capital market, the Saudi Capital Market Authority (CMA) moved forward the effective date of its foreign investment rule amendments to 4-Sept, from first half of 2017. In the MYR space, the 15y MYR3bn GII 9/30 Reopening auction came in at average yield of 4.16%, with weaker BTC of 2.49x against 2.62x previously. Ziya Capital (NR), the ABS vehicle under Bank of Tokyo-Mitsubishi, issued MYR630m senior sukuk and MYR270 subordinated sukuk.

SOVEREIGN UPDATES

Country/Issuer	Update	RHBFIC View
Damac Properties (NR; BB/Sta; NR)	Damac announced its 1H16 results on 11-Aug: ¨    Profitability: Damac reported on 11-Aug a drop in net profit by 27% YoY in 1H16 to AED1.94bn from 1H15 which stood at AED2.6bn, as management blamed a slow Ramadhan in the fall in property sales. Comparing from 2015, its EBITDA margin did have a slight improvement to 53.6% in 1H16 from 53.4% in 2015. ¨    Revenue was 29% lower than it was in 1H15, standing at AED3.37bn. Damac’s return-on-asset (ROA) fell to 10.8% in 1H16 from 13.4% in 2015.  ¨    Liquidity: Cash and bank balances stood at AED8.81bn in 1H16 (1H15: AED8.73bn), a 7.2% drop from end of 2015. Cash from operations-to-liabilities tightened to 0.4x in 1H16 from 0.9x in 2016. ¨    Its debt leverage (debt-to-asset) eased to 15.9% in 1H16 from 16.1% in 2015. ¨    Repayment capability: Debt-to-EBITDA weakened to 1x in 1H16 from 0.8x in 2015, while EBITDA-to-interest expense also deteriorated to 22.6x in 1H16 from 29.9x in 2015.	Mildly negative. Given weakened financials, we view this as mildly negative given its weakened repayment capability and weakened liquidity metrics. While its booked sales of AED3.63bn during 1H16 is on track to meet the full year guidance, we are concerned the slowing property market in Dubai over the past 2 years amid subdued oil prices and stronger AED which makes properties in Dubai more expensive for overseas investors.