Glomac Bhd - 2007

MARC has affirmed its ratings of Glomac Berhad’s (Glomac) RM60 million Junior Bai’Bithaman Ajil Islamic Bonds (Junior BaIDS) and RM25 million Murabahah Notes Issuance Facility / Islamic Medium Term Notes (MUNIF/IMTN) at A-ID /MARC-2ID respectively. The ratings outlook is stable. The affirmed ratings reflect the Group’s good market position, backed by the strategic location of Glomac’s development projects and improvements in its recent financial performance. These factors are countered by deterioration in its cash flow protection measures and the dilutive effect of a tightly structured debt issuance at a subsidiary on the credit strength of Glomac.

Glomac is a property development group founded in 1988. The Group has established a favourable track record as a developer of commercial and residential projects. Through wholly-owned subsidiary, Glomac Regal Sdn Bhd (GRSB), Glomac is building luxury condominiums in the vicinity of KLCC Park and Petronas Twin Towers. The condominium project, called Suria Stonor, has achieved 95% sales as at September 2007 with remaining units being offered at around RM1,100 to RM1,200 psf. However, cash flow from the project is ring-fenced as a result of GRSB’s MUNIF/MTN issuance which prohibits it from making distributions or loans to related entities prior to the full redemption of the facilities in 2009. Glomac has also undertaken to cover all cost overruns on the project in addition to providing a corporate guarantee for the RM175 million MUNIF/MTN. The Group is well positioned to benefit from the improved demand fundamentals of the property market with its planned project launches, estimated at close to RM1 billion in FY2008, involving new phases in existing townships and new developments which include Glomac Tower, Glomac Damansara, Sri Bangi and Glomac Galleria.

For FY2007 (ended April 30), Glomac’s revenue increased by 2.7% on the back of on-going projects namely Suria Stonor and Plaza Glomac. However, the Group reported a decrease in pre-tax profit of 12% mainly attributed to tax penalties and tax arrears amounting to RM5.6 million arising from under provisioning of income tax expense in prior years.

Glomac generated negative cash flow from operations in FY2007 a result of its land bank acquisitions and increased in accrued billings in respect of the Suria Stonor project. MARC anticipates improvements in cash flow measures with the completion of Suria Stonor scheduled in the second quarter of 2008. Debt leverage trended up to 0.99 times as at April 30, 2007 with additional borrowings of RM115 million to fund the construction of Suria Stonor as well as RM78 million of loans under various unsecured Collateralised Loan Obligation programmes. This was despite a 5.6% increase in total equity and RM25 million redemption of its Junior BaIDS on January 2007. Glomac’s debt service cover ratio (DSCR) stood at 2.41 times, comfortably above the minimum covenanted level of 1.5 times.

For the six months ended October 31, 2007 (first half FY2008), the Group recorded RM166.5 million in revenue, 33.3% higher than the corresponding period in FY2007. Pretax profit rose by 91.4% to RM31.4 million, whilst profit after tax rose to RM21.3 million as compared to RM8.4 million in the corresponding period in FY2007. Glomac’s strong performance was achieved on the back of RM141 million in sales, mainly contributed from its township development in Bandar Saujana Utama and Suria Stonor. The Group’s unbilled sales of RM336 million as at end of October 2007 provides good near-term revenue and earnings visibility. Debt leverage as measured by its debt to equity ratio, improved to 0.79 times as at October 31, 2007, subsequent to the completion of its rights issue. This provides the Group with more headroom vis-à-vis its covenanted debt to equity cap of 1.5 times.

The stable outlook may be revised to positive if the recent improvement in its operating performance continues over the medium term and is reflected in the strengthening of its financial profile.

Major Rating Factors

Strengths

• Favourable track record as a developer of commercial and residential projects;
• Sales have held up well relative to the industry;
• Healthy operating margins; and
• Ample liquidity to meet near-term debt maturities.

Challenges/Risks

• Conditions will remain challenging for its projects that are outside Klang Valley;
• Managing inventory levels; and
• Need to slow land purchases to generate cash flow and improve balance sheet liquidity.