MARC has assigned the ratings of MARC-1IS(fg)/AAAIS(fg) to LBS Bina Group Bhd’s (LBS-GB, or the Group) RM135 million Islamic Commercial Papers/Islamic Medium Term Notes (ICP/IMTN, or Sukuk) Programme. The ratings carry a stable outlook. The assigned ratings and outlook are underpinned by the unconditional and irrevocable Kafalah Guarantee provided by Danajamin Nasional Berhad (Danajamin) in relation to the ICP/IMTN Programme. MARC currently rates Danajamin’s financial strength as AAA/stable on the basis of its important role as Malaysia’s first and sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base, ample liquidity and conservative investment policy.

LBS-GB is a public listed domestic investment holding company with subsidiaries and associated companies largely engaged in property-related activities. The Group’s involvement in its current core business activity of property development began in 1992. Since the commencement of its property development operations, LBS-GB and its associated companies have completed over 23,500 units of mainly medium-cost residential, commercial and industrial properties in Malaysia with a total gross development value (GDV) of approximately RM3.0 billion.

Proceeds of the Sukuk Programme will be used mainly to finance three development projects and to redeem currently encumbered project land and properties.  Part of the Sukuk proceeds will also be set aside to pay Danajamin’s guarantee fee for the first year and to pre-fund its first profit payment under the Programme. The designated source of payment for the Sukuk Programme will be property development revenue from the sale of residential properties under three identified development projects.

The largest of the three identified development projects, Puchong Island, which has an estimated GDV of RM104.9 million, entails the development of the first two phases of 122 resort style two- to three-storey super-link house units on a waterfront location in Puchong, Selangor. The Puchong Island project, being the Group’s maiden lifestyle development offering to the high-end segment of the residential market, is likely to pose added execution risk for the Group given LBS-GB’s lack of track record in this particular market segment. Of the three projects, the Puchong Island project would have the most significant bearing on LBS-GB’s ability to enhance its future earnings and cash flow, based on its estimated GDV. The remaining two identified projects providing cash flow to service the Sukuk are the subsequent phases to LBS-GB’s Bandar Putera Indah Project in Batu Pahat, Johor which has an estimated GDV of RM41.2 million and Taman Royal Lily, Cameron Highlands with an estimated GDV of RM9.0 million.

MARC views the demand risk for the Bandar Putera Indah project as moderate in view of the affordability of the 218 single-storey semi-detached house units to be developed within an existing development that was initially launched in 2002. To date, a total of 702 residential units with a total GDV of RM71.0 million have been completed and fully taken up. Taman Royal Lily, on the other hand, is a relatively small scale project involving the development of 26 double-storey terrace house units in Tanah Rata, Cameron Highlands. Launched in March 2010, the 26 units have garnered a take-up of 92% as at May 31, 2010, substantially mitigating demand risk. MARC views the prospects for the Bandar Putera Indah and Puchong Islands projects, both of which will only be launched in 4Q2010, as less certain and sensitive to moderately improved housing market sentiments.

Since 2006, the Group’s overall historical financial performance has been on a downtrend, reflecting weaker volumes on account of deferred property launches, a significant rise in costs and lower margins. In financial year ended December 31, 2008 (FY2008), operating profit margins turned negative, but LBS-GB was still able to record a pre-tax profit of RM10.3 million (FY2007: RM13.8 million) owing to the recognition of substantial negative goodwill on an acquisition. Revenue dropped further by 24% in financial year ended December 31, 2009 (FY2009) to RM198.5 million due to the declining unbilled sales and absence of new launches in the prior two years. Notwithstanding the overall decline in results for FY2009, notable improvements in sales, operating margins, and pre-tax profits were observed in 4Q2009, thanks to new launches of higher margin offerings and more stable raw material prices. For the first quarter ending March 31, 2010 (1Q2010), further improvements in the Group’s financial performance were seen; its operating profit margins improved to 13.37% (FY2009: 4.89%).

LBS-GB’s gearing as measured by its debt-to-equity (DE) ratio rose to 0.63 times (x) in FY2009, on account of additional overdraft and bridging loan facilities taken to support its new property launches. On the other hand, net cash flow from operations (CFO) declined to a deficit of RM24.3 million mainly due to higher working capital requirements pertaining to new property launches. For 1Q2010, MARC noted further improvements in most profitability measures as well as for its net CFO, which returned to positive territory. Its consolidated DE ratio improved marginally, to 0.61x from FY2009’s 0.63x.

MARC believes that the Group will be dependent on its new property launches to provide the impetus for an earnings uptrend. Notwithstanding the limited earnings visibility of the Group’s yet-to-be-launched development projects and the inherent cyclical nature of its property development operations, noteholders are insulated from the downside risks in relation to LBS-GB’s credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

Contacts:

Ryan Lee Ju Vern, 03-2090 2230/ juvern@marc.com.my;
Francis Xaviour Joe 03-2090 2279/ fxjoe@marc.com.my