CENTRAL IMPRESSION SDN BHD - 2017

MARC has affirmed its rating of AA- on Central Impression Sdn Bhd’s (CISB) 11-year Fixed Rate Serial Bonds of RM120.0 million. The rating carries a stable outlook. CISB is the owner of the AEON Klebang shopping mall in Ipoh.

The affirmed rating reflects the credit strength of AEON Co (M) Berhad (AEON), which, as the principal lessee of the AEON Klebang shopping mall, is making fixed lease rental payments to CISB under a 10-year lease agreement expiring in 2022. The lease payments are deemed sufficient to meet the financial obligations under the bond issuance.

As at end-June 2017, the AEON Klebang shopping mall, which commenced operations in October 2015, was about 80% occupied with the AEON departmental store occupying about half of the mall’s 506,000 sq ft net lettable area. CISB’s exposure to market, sublease termination and sublease credit risks are eliminated by AEON’s obligation to meet lease rental payments for the entire mall under the terms of the lease agreement. CISB is, however, exposed to lease termination risk if it fails to meet its legal obligations that relate mainly to property management which is largely confined to insurance and quit rent payments. MARC regards lease termination risk as low given the company’s limited obligations.

AEON is a major retail player in Malaysia and is 51%-owned by Tokyo-based AEON Co Ltd, one of the largest retailer and property asset management companies in Japan. Operating 33 departmental stores across West Malaysia with an overall occupancy rate of about 90%, AEON has continued to expand and refurbish its retail mall network, spending about RM700 million in 2016. AEON, however, has reviewed its expansion plans by limiting new openings to only one mall per year and by rationalising its operations through the closure of non-performing stores. MARC views AEON’s strategy in response to the challenging domestic retail market as positive to improve its capital management and operating performance.

AEON’s leverage, as reflected by the debt-to-equity (DE) ratio, improved slightly to 0.46 times as at end-1H2017 (2016: 0.51 times) which is broadly in line with its strategy to reduce reliance on borrowings to fund expansion and refurbishment. For 1H2017, AEON’s revenue and pre-tax profit improved by 1.4% and 6.9% y-o-y to RM2.1 billion and RM82.4 million respectively. Its performance remains supported by stable income from subleasing retail spaces which generated RM327.5 million and RM109.9 million in revenue and operating profit respectively in 1H2017. The group’s retail segment, however, remains affected by the subdued retail market. Operating profit margin of its retailing operations remained below 1%.

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 remainder of the lease tenure. MARC takes comfort from the requirement for CISB to maintain a post-distribution debt service cover ratio (DSCR) of 1.75 times which would enable cash to be built up in the debt service reserve account (DSRA) to meet its scheduled serial bond redemptions. In addition, the requirement for a full cash build-up in the DSRA prior to the expiry of the 10-year lease term mitigates liquidity risk at the end of the bond tenure. As at end-June 2017, the DSRA balance of about RM14.0 million is more than sufficient to meet the next scheduled bond repayment of RM5.0 million on November 21, 2017.

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 is no longer commensurate with the current rating band due to an increase in leverage and/or declining profitability margins.

The stable outlook reflects MARC’s expectations that the construction will progress on schedule and stay within the allocated budget. The outlook is also based on the assumptions that Southern Power will receive the required approval for the PPA tariff revision and the project cash flow coverage will be maintained at current levels following such revision.

Major Rating Factors

Strengths

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

Challenges/Risks

• Building maintenance