SUNWAY BERHAD
SUNWAY TREASURY SUKUK SDN BHD

MARC has affirmed its MARC-1/AA- ratings on Sunway Berhad’s (Sunway) RM2.0 billion seven-year (2013-2020) Commercial Papers/Medium-Term Notes (CP/MTN) programme respectively. Concurrently, the rating agency affirmed its MARC-1_IS(cg) /AA-_IS(cg) ratings on Sunway Treasury Sukuk Sdn Bhd’s RM2.0 billion seven-year (2015-2022) Islamic Commercial Papers/Islamic Medium-Term Notes (ICP/IMTN) programme. Sunway has provided a corporate guarantee to the ICP/IMTN programme. The ratings outlook has been revised to positive from stable.

The outlook revision reflects MARC’s view of Sunway Group’s strengthening financial position, arising from increased contracts in its construction segment and stronger income streams from other business segments, notwithstanding the slowdown in the domestic property development sector on which the group has become increasingly less reliant as a major driver of its financial performance. The ratings affirmation considers Sunway’s moderate capital position and its established businesses in construction, property development and property investment.

As at mid-October 2017, Sunway’s outstanding construction order book stood at RM6.7 billion, of which about 82% is related to external contracts. Order book replenishment is expected to remain healthy given Sunway’s well-entrenched position as a key construction player in the country which would enable the group to secure future infrastructure projects to be rolled out by the government.

MARC notes that in line with the overall property slowdown, Sunway’s property sales have declined; recording an effective RM339.0 million in 1H2017 (1H2016: RM510.0 million). Nonetheless, the overall average take-up rate of the group’s ongoing projects stood at 70.2% as at end-1H2017 and its inventory of completed units remains manageable. Its effective contracted-but-unbilled sales of RM908.0 million as at June 30, 2017 provides earnings visibility through 2019. Sunway’s effective undeveloped land bank stood at 2,276.6 acres as at end-October 2017, of which about 48% is in Johor. The risks associated with property development in Johor are mitigated by Sunway’s low purchase price paid for the land in the state and its long-term development strategy, spanning more than 15 years.

In 1H2017, Sunway’s property investment segment recorded stronger performance on the back of additional net lettable area (NLA) coming onstream following the opening of Sunway Velocity Mall in Kuala Lumpur at end-2016 and Citrine Hub in Johor in 2Q2017. As at end-August 2017, its total NLA stood at 4.4 million sq ft with the overall occupancy rate remaining high at 97%. In addition, Sunway’s 37.3%-owned associate, Sunway REIT, continued to perform well, recording a 4% y-o-y growth in property income to RM388.8 million, while profit before tax (PBT) rose by 31.1% y-o-y to RM424.5 million on higher fair value gains.

Sunway Group’s consolidated revenue and PBT grew by 4.8% y-o-y and 11.8% y-o-y to RM2,332.3 million and RM424.6 million respectively in 1H2017 (unaudited). Cash flow from operations (CFO) stood at RM73.9 million due to increased working capital requirements while the free cash flow (FCF) deficit was RM291.6 million on ongoing construction of investment properties. Notwithstanding the FCF deficit, net debt levels were only marginally higher by RM154.7 million at end-1H2017.

Sunway Group’s borrowings stood at RM8.4 billion as at end-1H2017 (end-2016: RM7.4 billion), but with sizeable cash reserves of RM4.9 billion, its net debt-to-equity (DE) has remained modest at 0.41 times. Sunway’s financial flexibility is deemed strong with its established access to capital markets and unutilised credit lines of RM1.5 billion at end-1H2017 (excluding the rated issues). Additionally, the group’s unencumbered assets as at end-2016 had a market value of RM6.4 billion which include investment properties that could be divested to Sunway REIT. The group also has a RM10.0 billion unrated Sukuk Wakalah and/or Sukuk Mudharabah programme with an undrawn limit of RM9.99 billion.

The positive outlook reflects MARC’s expectation that Sunway’s financial metrics will further improve in the near term. Upward rating triggers include a significant reduction in its net debt position and a sustainable trajectory of positive FCF generation post-capital spending. Rating pressure will develop should the group experience a decline in its business segments and/or adopt a more aggressive financial strategy that would impact its overall credit profile.

Major Rating Factors

Strengths

• Significant track record in property and construction businesses;
• Strong 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.