OSK Property Holdings Bhd - 2007

MARC has reaffirmed the ratings of OSK Property Holdings Bhd (OSKP)’s Class A and Class B BaIDS at AID and A- ID respectively. The ratings outlook is negative. The ratings reflect OSKP’s strong presence in Sungai Petani, Kedah through its development in Bandar Puteri Jaya (BPJ), strong shareholders support, moderate level of cash flow diversification and financial flexibility. However, these factors are tempered by OSKP’s declining profitability measures, negative free cash flow generated and increasing leverage position.

The negative outlook reflects the delay in some of OSKP’s property projects in Mon’t Jade and Sri Banyan in Kajang which affected its profitability measures. Nevertheless, the negative outlook could likely be lifted and revised to stable in the near term if OSKP is able to reverse the delay of the projects as well as the pace of revenue and profit recognition of its existing projects and translating these key rating factors into improved earnings and cash flows.

To date, the credit profile of OSKP’s hinges on the success of its flagship development, BPJ. Since its first launch in 1999, the take up rate of BPJ has been rather good in which the OSKP recorded a gross development value of RM550 million from a total of RM640 million as at 31 August 2007. During this period, OSKP sold 4,550 units from a total of 5,105 units launched which translated into a take up rate of 89%. Despite lower revenue and cash flows in FY2006 mainly attributable to the delay in launches, MARC expects in the short to intermediate term, BPJ to continue contribute bulk of its cash flows from the existing units and new launches planned in year 2007 and beyond. Meanwhile, OSKP’s other development projects namely in Seremban, Kajang, Sungai Buloh to name few will allow some diversification away from its flagship development, going forward. The group has also started to diversify its property portfolio into property investment from property development, with an intention to build up its recurrent income base. As such, OSKP has acquired Atria, a shopping mall situated in Damansara Jaya for a total cash consideration of RM75 million. The rental from the shopping mall will be rather insignificant as compared to its property development in the first 2 years but is projected to record higher cash flow in the remaining years.

Under the issue structure, sales receivables under BPJ’s projects have been identified as the main source of repayment for the BaIDS. As at 31 August 2007, OSKP has complied all its covenants with security coverage being well above the covenanted level of 1.43 times, stood at 1.69 times.

OSKP’s profitability measures has been declining in the last 3 consecutive years with revenue and operating profit for fiscal year 2006 dropped sharply by 6% and 42% respectively against FY2005. The profitability measures further deteriorated in the first 9 month interim results of FY2007 with OSKP recording an operating margin of 11.9% against 17.3% in the previous corresponding despite. During this period, revenue increased by 14% to RM58 million as compared to RM51 million in the previous 9 month interim results. Delay in launches, higher construction cost and lower sales realized from overhang units were the main reasons behind the drop in margin. MARC considers the profitability measures to be lower than its rated peers.

Credit protection measures were weak in FY2006. Funds from operations took a hit with its coverage ratio stood at mere a 1% as compared to 12% in the previous year. The negative free cash flow generated is expected to continue in the short to intermediate term with capital expenditure commitments for next 2 years is estimated at RM126 million. These commitments will be funded through OSKP’s recent rights issue exercise amounting to RM100 million and the remaining balance, through bank borrowings. OSKP’s debt leverage position has been showing an increasing trend in the last 4 years but remains acceptable within the current rating level. The group’s debt leverage position is set to increase further with the acquisition of Atria mall in middle of year 2007.

Major Rating Factors

Strengths

• Strong presence in its flagship project in Bandar Puteri Jaya; and
• Strong shareholder support.

Challenges/Risks

• Declining profitability measures;
• Delay in some of its projects;
• Negative free cash flow generated; and
• Increasing debt leverage position.