MARC has assigned a final rating of AA+_IS with a stable outlook to Sime Darby Property Berhad's (SD Property) Islamic Medium-Term Notes programme of RM4.5 billion under the Shariah principle of Musharakah (Sukuk Musharakah Programme). The 30-year Sukuk Musharakah programme expiring in 2039 had been novated to SD Property from Sime Darby Berhad as part of the restructuring exercise undertaken in 2017, during which it became unrated. Proceeds from initial issuances of up to RM800 million under the rated programme will be largely used to refinance group borrowings.

The assigned rating incorporates a one-notch rating uplift on the basis of MARC's assessment of implicit support from Permodalan Nasional Berhad (PNB) which has a 58.5% stake in the company as at September 30, 2020. The standalone rating is driven by SD Property's well-established position as a township developer, its sizeable landbank in key population growth areas, its steady sales performance and low leverage position. Moderating the rating is the prevailing weak property market condition that could weigh on take-up rates. The stable outlook assumes the group's business and financial performance will be broadly in line with MARC's expectations and that the debt-to-equity (DE) ratio would remain below 0.5x over the next 12-18 months.

SD Property has over 47 years of experience in developing residential townships and communities and remains a leading domestic property developer. It has 24 active townships and niche developments with a key focus on developing landed residential properties in the mid-range segment. The group has the largest landbank among all property developers in Malaysia with about 19,850 acres, of which majority of the landbank for ongoing developments is located in areas along the Guthrie Corridor Expressway and within the Klang Valley that offers strong potential for township and industrial developments. Ongoing projects carry a total gross development value (GDV) of about RM5.0 billion as at end-September 2020. With unbilled sales of RM1.5 billion, the group has earnings visibility over the next two years.

For 1H2020, its overall take-up rate for ongoing projects stood at a healthy 65% relative to many of its peers, reflecting its strong market position. Gross profit margin has averaged at 23% between 2017 and 2019; however, its high administrative and marketing expenses have resulted in comparatively lower operating profit margin of around 13.9%.

For 1H2020, SD Property recorded core losses before interest and tax of RM21.3 million due to the impact from the COVID-19 outbreak which had affected sales activities and construction progress between March and June 2020. MARC understands that since the easing of movement restrictions, construction activities have resumed. Group borrowings have been relatively flat since 2018, standing at RM3.3 billion at end-June 2020; SD Property has partly funded its operations through divestment of land and non-core assets. Included in group borrowings is a syndicated facility incurred by its concession subsidiary companies undertaking the Pagoh Education Hub project in Johor. Its consolidated DE ratio has remained relatively low at 0.35x (net DE: 0.27x) at end-June 2020.

In 1H2020, the group generated cash flow from operations (CFO) of RM227 million, translating to a moderate CFO interest coverage of 2.85x (2019: 2.38x). Its major commitments over the next 2-3 years include funding requirements for industrial and logistics developments and a capital call of about RM740 million for its Battersea redevelopment project in London. SD Property has retained strong financial flexibility stemming from significant unutilised financing facilities and sizeable unencumbered landbank.

Major Rating Factors