MK Land Holdings Bhd - 2007

MK Land Holdings Berhad’s (MK Land) RM300 million Serial Bonds Tranche 1 and 2 rating has been downgraded from A- to BBB+. The rating outlook is developing. The rating downgrade reflects its weakening business and financial risk profile, in particular of its lower take up rate in its Damansara Perdana and Damansara Damai developments, MK Land’s weak profitability measures, as well as continued negative operating and free cash flow. The rating is underpinned by its vast land bank situated in and out of Klang Valley and its robust shareholders funds.

MARC has also revised its rating outlook to developing from negative. The Group’s credit quality now depends to a large extent on whether MK Land is able to access adequate new funding to alleviate its short term liquidity issues and meet its August 29, 2008 RM60 million scheduled bond repayment. The developing outlook highlights uncertainties regarding the Group’s near term funding flexibility. If MK Land is unable to raise adequate capital over the near term to improve its funding structure and ease its liquidity pressures, the rating could be lowered.

MK Land’s core activities are in the areas of property development, leisure and investment holding. Take-up rates of its flagship developments in Damansara Perdana and Damansara Damai have been below MARC’s expectations in the last two consecutive years. Although the take up rate for Metropolitan Square in Damansara Perdana improved with most of the phases recording take-up rates exceeding 80%, continued poor take up rate performance of Armanee Terrace condominiums and the Group’s Damansara Damai development has weakened its cash flow generation substantially. The Group may have to make further provisions for Liquidated Ascertained Damages (LAD) in the short to intermediate term given the slow pace of its construction progress. To date, MK Land has made total LAD provisions amounting to RM25 million, of which RM6.9 million was recognized in FY2007.  Although the proceeds from the Group’s flagship developments are identified as the primary source of repayment for the facility, the Group’s other property projects outside Klang Valley may potentially provide some cash flow support for the facility.

MK Land has found it difficult to maintain its historical levels of profitability. MK Land’s profitability measures which were already weak in FY2006, have weakened further in FY2007. Operating margins have exhibited declining trend for the last 3 consecutive financial years, down from 17.09% in FY2006 to 14.6% in FY2007. MK Land’s operating profit of RM36 million in FY2007 was bolstered by a RM82 million gain on revaluation of its investment properties. Excluding this gain, the Group would have posted an operating loss of RM47 million for the year. MARC does not expect MK Land’s profitability and earnings to improve significantly over the near to intermediate term.  

MK Land’s credit protection measures continued to deteriorate in FY2007, with the Group recording a deficit in the operating cash flow for the second year running. MK Land’s capital spending on land acquisition has resulted in an even larger deficit in cash flow compared to FY2006. The deficit in the cash low was predominately debt financed through term loans and trade lines. MARC expects MK Land’s capital spending requirements to be lighter, going forward. Despite the increase in borrowings, the Group’s debt to equity ratio of 0.54 times as at June 30, 2007 (up from 0.40 times the year before) is satisfactory compared to other property developers in the same rating category. MK Land’s ability to preserve its current capital structure will depend on whether it is able to achieve the necessary improvement in the level and stability of its earnings.

Major Rating Factors

Strengths

- Vast prime land bank; and
- Strong shareholders funds

Challenges/Risks

- Accessing new adequate funding to meet near-term debt maturities;
- Poor take up rate in certain projects;
- Project completion delay resulting in rising exposure to liquidated ascertained damages (LAD); and
- Deteriorating cash flow measures