MARC Ratings has affirmed its ratings of MARC-1_IS/AA-_IS on UDA Holdings Berhad’s (UDA) Islamic Commercial Papers (ICP) Programme of up to RM100.0 million and Islamic Medium-Term Notes (IMTN) Programme of up to RM1.0 billion, with a combined aggregate limit of up to RM1.0 billion. The ratings outlook is stable. 

The ratings incorporate a one-notch uplift from UDA’s standalone credit profile due to the potential support from the government. UDA is wholly owned by the Ministry of Finance (MoF) and comes under the purview of the Ministry of Entrepreneur and Cooperatives Development (MECD). MARC Ratings notes that UDA’s role in property development remains aligned with the government’s socioeconomic objectives, as reflected in the government’s strong control and oversight of the company through board representation and policies. The government also exerts significant influence on UDA’s business strategy via MECD. 

UDA’s standalone rating considers its longstanding track record in property development and its healthy balance sheet, characterised by a low-to-moderate leverage position. Nonetheless, its profitability has weakened and could come under further pressure from sluggish property demand that could lead to higher inventory levels.  

Ongoing gross development value (GDV) rose to RM868.2 million as at end-June 2023 from RM494.8 million as at end-September 2022, including the May 2023 launch of Dedaun Residensi, a condominium project in Bandar Tun Hussein Onn, Cheras, with a GDV of RM151.9 million. UDA will undertake an integrated development project with a GDV of RM472.6 million with Sarawak Economic Development Corporation (SEDC) in Pending, Sarawak. The collaboration with the Sarawak state government underscores UDA’s important role in housing development at both the federal and state levels. 

The average take-up rate for ongoing projects was moderate at 58.1%, mainly due to slow sales of its Residensi 38 Bangsar condominiums. As a result, inventory levels — at RM239.3 million as at end-June 2023 — could increase in 2024.  MARC Ratings notes that about 66% of the inventory comprises unsold office units in Legasi Kampong Bharu, which is a concern considering the current oversupply in Kuala Lumpur’s office market. The rating agency understands that UDA is looking to lease out or sell the offices en bloc. 

In 2022, revenue from investment properties — mainly office buildings and shopping complexes — recovered to pre-pandemic levels at around RM120 million, up from RM85 million previously. As at end-June 2023, the average occupancy rate for its commercial properties was 85.2%. Meanwhile, income from its hospitality segment — comprising mid-range hotels and a golf resort — was modest on a low average occupancy rate of 41.4%, while income from its facility management services was stable at about RM40.0 million p.a. Unbilled sales of RM275.2 million as at end-June 2023 provide some earnings visibility in the near term.

In 1H2023, revenue declined 30.0% y-o-y to RM181.1 million due to slower property sales. It reported pre-tax loss of RM10.5 million during the period as earnings were largely impacted by lower revenue and higher input and financing costs. Total borrowings rose to RM1.0 billion, including the initial RM500.0 million drawn under the rated IMTN programme to support working capital requirements, finance property development and refinance existing bank borrowings. However, in September 2023, a RM165.3 million treasury loan from MoF had been converted into equity, simultaneously reducing total borrowings to around RM835.0 million. All else being equal, this would improve UDA’s gross debt-to-equity ratio from 0.36x as at end-June 2023 to an estimated 0.28x as at end-September 2023. 

In terms of financial flexibility, UDA has about RM452.0 million of unutilised banking lines. Its sizeable unencumbered landbank of about 1,010 acres with an estimated market value of about RM2.6 billion also provides a strong source of additional liquidity.

The stable outlook reflects MARC Ratings’ expectation that UDA will continue to receive strong government support and perform according to expectations.

The rating is unlikely to be upgraded in the near term given the current challenges UDA faces and the weakening prospects for the property industry.  Downward rating pressure on the standalone rating would increase if sales performance were to weaken and/or inventory levels were to increase and/or borrowings were to sharply increase beyond projections that will skew its leverage position substantially.