CENTRAL IMPRESSION SDN BHD - 2016

MARC has affirmed its rating of AA- with a stable outlook on Central Impression Sdn Bhd’s (CISB) 11-year Fixed Rate Serial Bonds of RM120.0 million.

The affirmed rating reflects the credit strength of AEON Co. (M) Berhad (AEON) as the principal lessee of the AEON Klebang shopping mall which is owned and was developed by CISB from the bond proceeds. The fixed lease rental payments from AEON to CISB under a 10-year lease agreement are deemed sufficient to meet the financial obligations under the bond issuance. AEON is obligated to meet lease rental payments regardless of occupancy levels, which eliminates CISB’s exposure to market, sublease termination and sublease credit risks. CISB is, however, exposed to lease termination risk if it fails to meet its obligations under the lease agreement which are mainly related to property management. MARC regards lease termination risk as moderate given the company’s limited obligations with respect to the building’s structural aspects, insurance and quit rent payments.

Located in Ipoh, the AEON Klebang shopping mall commenced operations in October 2015; as at end-June 2016, the mall was about 80% occupied with the AEON departmental store occupying about half of the net lettable area of 506,000 sq ft. MARC observes that the occupancy rate of retail malls in Ipoh has been on a declining trend, largely due to an increase in retail space. Over the medium term, occupancy levels and rental rates in Ipoh are expected to be weighed down by challenging prospects for the domestic retail industry.

AEON, a 51%-owned subsidiary of Japan-based AEON Co. Ltd, has a strong competitive position in the domestic retail industry through its 32 departmental stores spread across West Malaysia, 26 of which are in malls in which the retailer is the principal tenant under long-term lease agreements. For 1H2016, AEON registered a 6.9% y-o-y increase in revenue to RM2.1 billion. Its performance remains supported by stable income from subleasing retail spaces which generated RM293.5 million and RM103.9 million in revenue and operating profit respectively in 1H2016. However, pre-tax profit was lower at RM77.1 million (1H2015: RM92.6 million), mainly as a result of retail margin compression and higher financing cost.

MARC observes that AEON’s continuous investments in expanding its retail mall network and refurbishing existing malls have exerted pressure on the group’s credit metrics. The group spent about RM700 million in 2015 for this purpose and has planned capex of up to RM2.4 billion over the next five years. While historically AEON had relied on internally generated funds to support its expansion plans, it began to tap external funding sources since 2014. As a consequence, group leverage, as reflected by the debt-to-equity ratio (DE), increased to 0.45 times as at end-1H2016 (2014: 0.08 times). AEON has set up a RM1.0 billion 15-year Islamic Medium-Term Notes/Islamic Commercial Papers programme in April 2016, mainly to refinance its existing facilities and to part fund its expansion plans. The increase in leverage position notwithstanding, AEON’s credit metrics are broadly in line with the rating band.

CISB’s stable cash flow stems from periodic lease rental payments from AEON, which is fixed at RM18.3 million per annum (RM3.01 psf per month) for the first five years and RM18.7 million per annum (RM3.08 psf per month) for the next five years. MARC takes comfort from the fact that CISB is required to maintain a debt service cover ratio (DSCR) of 1.75 times post-dividend which would enable cash to be built up to meet its scheduled bond redemptions of RM5.0 million per year for the first two years, and up to RM15.0 million per year throughout the bond’s remaining tenure. The requirement for a full cash build-up of the debt service reserve account (DSRA) prior to the expiry of the 10-year lease term mitigates liquidity risk. As at end-June 2016, the DSRA balance of about RM9.0 million is more than sufficient to meet the first bond repayment of RM5.0 million in November 2016.

The stable outlook reflects MARC’s expectations that AEON’s financial strength will remain supportive to meet its lease obligations. Downward rating pressure could develop if AEON’s credit profile weakens to an extent that is not commensurate with the current rating band.

Major Rating Factors

Strengths

• Lease rentals from creditworthy principal tenant AEON Co. (M) Berhad.

Challenges/Risks

• Lack of track record in building maintenance operations.