MARC Ratings has affirmed its AA-_IS rating on Malaysian Resources Corporation Berhad’s (MRCB) Islamic Medium-Term Notes Programme of up to RM5.0 billion (Sukuk Murabahah) with a stable outlook.

Rationale  

MRCB’s established track record in property development with a focus on transit-oriented developments (TOD) and its strong position in the domestic construction sector with sizeable infrastructure contracts remain key rating drivers. The rating also incorporates the support extended by key shareholder, the Employees Provident Fund (EPF) Board. These strengths are moderated by MRCB’s thin margins and high working capital needs primarily due to the lengthy collection period for its construction-related receivables, as well as a challenging property sector outlook. 

MRCB had about RM5.4 billion in outstanding external construction order book as at end-June 2023, providing earnings visibility through 2027. MARC Ratings, nevertheless, notes the reduction in order book from around RM10 billion as at end-March 2020. However, a rebuild of the order book is likely in the near- to medium-term as more projects are tendered including the redevelopment of the Shah Alam Stadium, the new Mass Rapid Transit 3 (MRT3) project in the Klang Valley, the Pan Borneo Highway project in Sabah, and a flood mitigation project in Pahang. The more complex nature of some of these projects is also positive from a margin standpoint and could improve MRCB’s overall operating profit margin which has remained in the single digits in recent years, in part due to higher material and labour costs.

For its ongoing property projects, MRCB had approximately RM280 million in gross development value (GDV) as at end-June 2023, significantly lower compared to the RM3.1 billion as at end-March 2020. Given a challenging property market outlook, MRCB has taken the approach of slowing its property launches. The lower GDV was also due to the completion of the group’s Sentral Suites project in 2023. The overall take-up rate for MRCB’s ongoing projects was 55% as at end-June 2023. The slow take-up could see inventory level for unsold completed property rising over the near term from RM582.5 million as at end-June 2023 (end-2022: RM220.8 million). 

On the local front, the company had minimal unbilled sales of RM43.7 million as at end-June 2023, but has plans to launch a new project with a GDV of RM372 million over the near term. We note that MRCB has 64.3 acres of land at the strategic Kwasa Sentral, which is fast developing into a key mixed development area in the Klang Valley. The company has also planned for three TOD projects at PJ Sentral Garden City, Penang Sentral and Cyberjaya City Centre, that could support top line growth over the medium to longer term. The rating agency also notes that through its 27.9%-owned associate, Sentral REIT (formerly known as MRCB Quill REIT), MRCB receives stable rental earnings of RM15.8 million p.a. Sentral REIT currently has nine commercial buildings — four each in Cyberjaya and Kuala Lumpur, and one in Penang — collectively valued at RM2.1 billion. The REIT will acquire Menara CelcomDigi, a 27-storey office tower with 450,000 sq ft of net lettable area (NLA) for RM450 million; the acquisition will increase its NLA to about 2.5 million sq ft.

Abroad, MRCB launched VISTA in April 2023, a residential project in Gold Coast, Australia, with a GDV of AUD391 million. The 51-storey, 280-unit VISTA is expected to be completed by end-2026. MRCB also plans to undertake a NZD452 million TOD above the City Rail Link Aotea station in Auckland, New Zealand, after the expected completion of the Aotea Central Station in 2026. The rating agency expects MRCB’s overseas projects to somewhat offset the uncertainties in the domestic property market. 

Group revenue declined by 11.2% y-o-y to RM1.3 billion in 1H2023 due to lower contribution from its engineering, construction and environment segment following the completion of the MRT2 and Damansara – Shah Alam Elevated Expressway (DASH) packages in 2022. Pre-tax profit sharply declined by 40.1% y-o-y to RM35.8 million on higher finance and operating costs. Total borrowings rose y-o-y to RM2.3 billion as at end-June 2023, translating into gross and net debt-to-equity (DE) ratios of 0.50x and 0.34x. The outstanding RM1.65 billion Sukuk Murabahah accounted for 73% of total borrowings.

The stable outlook reflects our expectation that MRCB will broadly maintain its credit profile within the current levels over the next 12 months.

A rating and/or outlook upgrade is unlikely in the near term. Any upgrade would hinge on the strong operating performance of its key businesses and sharp improvement in cash flow metrics. 

Rating pressures would occur if MRCB’s business profile continues to weaken, resulting in weak operating performance and/or if the group undertakes substantial acquisitions that will lead to a sharp increase in debt obligations.