SUNWAY BERHAD - 2016

MARC has affirmed the ratings on Sunway Berhad’s (Sunway) RM2.0 billion 7-year (2013-2020) CP/MTN programme at MARC-1 / AA-. Concurrently, MARC has affirmed the ratings of the RM2.0 billion 7-year (2015-2022) ICP/IMTN sukuk programme issued by Sunway Treasury Sukuk Sdn Bhd (STSSB) at MARC-1_IS(cg) /AA-_IS(cg). STSSB is a special purpose funding vehicle which is wholly-owned by Sunway, where its sukuk programme issue is guaranteed by Sunway. The outlook on the ratings is stable.

The affirmed ratings are driven mainly by the Sunway group’s established market position in property development, property investment and construction, and its strong liquidity position. Constraining the ratings are the group’s exposure to the cyclicality of the property and construction sectors, its increased borrowing levels and its modest geographical diversity in property development.

For 1H2016, Sunway recorded flat revenue growth of RM2.2 billion and a 19.9% year-on-year decline in profit before tax (PBT) to RM379.9, reflecting mainly the challenging conditions in the property market. In addition, Sunway recorded a lower share of revaluation gains in investment properties owned by associate company, Sunway REIT. The group’s weaker performance in its property segment was, however, cushioned by improved performance in the other segments which include healthcare, quarry and building materials.

MARC views that as a result of lower property launches and relatively slower take-up rates, the performance of Sunway’s property development would continue to be subdued over the near term. As at end-April 2016, the overall average take-up rate was 61.2% for ongoing projects with an effective gross development value (GDV) of RM4.7 billion. Given concerns of oversupply in Johor, particularly in the Iskandar region, Sunway’s large exposure in the state remains a concern. The state accounts for 14.9% and 48.3% of its total effective GDV for ongoing projects and undeveloped land banks respectively. This notwithstanding, Sunway’s developments featuring low plot ratios and integrated townships as well as its established market position would help support sales. Its effective contracted-but-not-billed sales of RM1.5 billion as at end-1H2016 will provide earnings visibility in the next two years.

In the construction segment, Sunway’s order book increased by 81.5% to about RM4.8 billion as at end-September 2016 (end-July 2015: RM2.6 billion), of which about 73.1% comprises external contracts. While the segment’s PBT was RM72.2 million in 1H2016 (1H2015: RM108.5 million), MARC expects better performance in 2H2016 on higher billings and earnings recognition as progress on infrastructure projects increases. The property investment segment reported lower PBT of RM74.8 million in 1H2016 (1H2015: RM175.9 million) largely due to lower fair value gains from revaluation of Sunway REIT properties. Investment properties owned and managed by Sunway recorded a higher overall occupancy rate of 98.8% as at end-April 2016 (end-March 2015: 93.9%), largely lifted by the improved occupancy of Sunway Pinnacle, an office block next to Sunway Pyramid which was completed in 2014.

For 1H2016, cash flow from operations (CFO) was low at RM30.8 million (2015: RM730.4 million), due mainly to increased working capital requirements. The group continued to register negative free cash flows (FCF) of RM458.5 million in 1H2016 (2015: negative RM608.5 million) due to ongoing capex and acquisition of land in Selangor, which was supported by proceeds from the conversion of warrants totalling RM517.4 million. The capex spending also stems from the ongoing construction of investment properties, namely Sunway Velocity Shopping Mall, Sunway Pyramid Phase 3 and Sunway Medical Center Phase 3. MARC expects the FCF deficit to widen in 2016 as Sunway’s capex requirement is expected to increase to about RM1.5 billion before decreasing in 2017 with an earmarked capex requirement of RM635.7 million. The pressure on its cash flows is somewhat mitigated by Sunway’s ability to monetise some of its investment properties by injecting them into Sunway REIT.

Total borrowings have increased to RM6.8 billion as at end-1H2016 (end-2015: RM5.9 billion); nonetheless, its debt-to-equity (DE) ratio of 0.87 times and net DE of 0.40 times are still within its rating band. Sunway is, however, exposed to refinancing risk stemming from its high composition of short-term debt which comprises 65.5% of the total debt. MARC takes comfort that refinancing risk is partially mitigated by cash reserves of RM3.7 billion as at end-1H2016. Sunway’s financial flexibility is deemed strong with access to equity markets, unutilised credit lines of RM1.3 billion as June 30, 2016 (excluding the rated issues) and unencumbered assets with a market value of RM3.8 billion as at end-2015.

The stable outlook reflects MARC’s expectations that Sunway’s credit metrics remain commensurate with the rating band. Rating pressure will develop should the group experience a decline in its property and construction activities and/or adopt a more aggressive financial strategy that would impact its overall credit profile. Any improvement in the rating and outlook would need to be supported by a reduction in its debt position and a sustainable increase in FCF generation.

Major Rating Factors

Strengths

• Significant track record in property and construction businesses;
• High order book replenishment for construction segment; and
• Stable income stream from investment properties.

Challenges/Risks

• Challenging property market outlook; and
• Potential increase in borrowings to meet working capital and capex requirements.