Harum Intisari Sdn Bhd - 2007

MARC has reaffirmed the MARC-1ID(cg)/AA- ID(cg) of Harum Intisari Sdn Bhd’s (HISB) Al-Murabahah Commercial Papers (MCP) and Medium Term Notes (MMTN) with a nominal value of up to RM300.0 million. The ratings outlook is stable. The ratings are based on an unconditional and irrevocable corporate guarantee extended by HISB’s ultimate holding company, Gamuda Berhad (Gamuda). The ratings reflect Gamuda’s strong business and financial risk profile, underpinned by its sizeable construction order book, diversified earnings base, high level of cash flow diversification, exceptional financial flexibility and moderate debt leverage. Meanwhile, HISB’s strong stand-alone credit quality is backed by the fairly robust demand for its innovative residential development offerings, improving profitability, and the benefits HISB derives from the financial flexibility and operational support from its parent. These factors are tempered by the cyclicality of the property sector, the company’s negative operating cash flow, high debt leverage and single project concentration risk.

The stable outlook for the ratings of the notes mirrors that of Gamuda, and reflects the expectation that Gamuda will maintain its competitive position in the domestic construction sector and abroad while preserving its strong financial profile. Gamuda’s strong business risk profile is reflected in its diversified earnings base derived from its core businesses of construction, property development, water as well as highway concessions. Gamuda’s construction division currently has an outstanding order book size of approximately RM10 billion, of which a sizeable portion is accounted for by overseas projects while its property development division  recently secured a mixed development project in Vietnam valued at RM10 billion. Its water and highway concession businesses will continue to provide long term recurring income and stable cash flow. 

HISB’s sole residential development is Bandar Botanic, an integrated township in Klang that is surrounded by mature housing developments. The 1,241 acre township has an estimated gross development value of RM3 billion and is 65% completed. About 65 acres of land is currently being developed while the remaining land bank stands at 535 acres. As of 31 May 2007, HISB has launched a total of 6,335 units of which 5,872 units were sold, translating into a relatively high take up rate of 92.7%. The remaining gross development value amounting to approximately RM1.4 billion and the favourable performance of recent property launches are supportive of HISB’s earnings visibility in the short to intermediate term and its financial projections. Additionally, future developments will include higher margin properties such as bungalow land/homes, semi-detached houses and commercial properties which will bolster HISB’s financial performance.

Profitability measures improved in FY2006. Revenue was up by 31% in FY2006 as compared to FY2005, reflecting the higher number of property launches during the fiscal year. HISB’s operating margins also recovered as indicated by the 11.11% operating margin in FY2006, compared to only 7.39% in FY2005 and 12.54% in FY2004. HISB’s profitability measures should be sustained in the short to medium term if the company keeps to its development schedule for Bandar Botanic. For the first 10 months of FY2007, the company recorded an unaudited profit before tax of RM43.6 million, which is higher than FY2006’s full year profit before tax of RM30.5 million.

Prior to the issuance of the notes, HISB’s working capital needs were mostly met through holding company advances and internal cash flow generation. In FY2006, the notes proceeds were used to repay inter-company borrowings. The company’s historical cash flow indicators, in particular its fund from operations and debt service coverage ratios have been volatile. Nonetheless, improving revenue and profit trends will support improved cash flow generation going forward.

HISB debt leverage position of 1.17x is adequate for the current rating with its debt mainly comprising MMTN issued in FY2006. The company benefits from the financial flexibility of its public listed parent which had RM4.7 billion in total assets and RM3.0 billion in total equity (based on its unaudited consolidated balance sheet) as at April 30, 2007.