Berjaya Land Bhd - 2007

MARC has affirmed the A rating of Berjaya Land Berhad’s (BLand) five-year Secured Exchangeable Bonds (EB) with nominal value of up to RM900 million which are exchangeable into shares of leading domestic Numbers Forecast Operator (NFO), Berjaya Sports Toto Berhad (BToto). The rating outlook is stable. The rating on the EB reflects the resilient financial performance of BToto, the collateral cover of 130% afforded by BToto shares charged against the nominal value of the bonds with top-up requirements, and adequate interest coverage of 1.2 times by dividends paid on the pledged shares of BToto. BToto became a subsidiary (previously an associate) of BLand as of February 2008 following a recent share buy back exercise. Moderating the rating is BToto’s sensitivity to economic conditions which affect consumer spending and its exposure to regulatory risk with respect to gaming tax and licenses. The stable outlook is premised on the strong competitive position of BToto as a leading player in the NFO market.

The exchangeability of the bonds hinges on the performance of BToto’s shares which in turn is driven by the company’s operating fundamentals, financial performance and dividend policy. BToto’s financial results remained favourable in FY2007 with stable earnings growth, albeit at a lower rate, coupled with strong margins. The upward-trending revenue reached a record high of RM3.0 billion in FY2007. Excluding a gain from the disposal of the Irredeemable Convertible Unsecured Loan Stock (ICULS) of RM24.3 million in FY2006, pre-tax profit fell marginally by 0.4% in FY2007 compared with FY2006 mainly due to higher finance costs and lower interest income from affiliates. Revenue and pre-tax profit for the six months ended 31 October 2007 improved by 8.1% and 6.6% to RM1.5 billion and RM260.6 million respectively, compared to the previous year’s corresponding period. Pre-tax profit rose on the back of higher revenue although the increase was moderated by lower interest income received from BLand due to the significantly lower outstanding balance in inter-company loans. BToto’s shareholder-friendly dividend policy of distributing 75.0% of net profit and actual dividend payout ratio exceeding 100% over the past four years remain supportive of its share performance and BLand’s interest coverage ratios. The present moratorium on new licences means that BToto’s strong competitive position is unlikely to come under threat in the near term and the outlook for earnings and cash flow should remain stable.

BLand, the issuer of the EB, is an investment holding company with subsidiaries engaged in three core activities: vacation timeshare, hotels, resorts & recreation development; property investment and development; and gaming and lottery management. The issuer’s credit profile is moderated due to its lacklustre financial position, the cyclical nature of its property development operations as well as the challenges faced by its projects in Vietnam, China and Thailand.

BLand recorded pre-tax loss of RM15.9 million in FY2007 mainly due to higher depreciation charges incurred by the hotels and resorts division resulting from the adoption of FRS 116, impairment in value of certain assets and loss incurred on the disposal of Berjaya Resort (Sabah) Sdn Bhd. Excluding the impairment loss and depreciation charges, the Group would have recorded a pre-tax profit of RM31.0 million. Notwithstanding BLand’s pre-tax loss, its consolidated Cash Flow from Operations (CFO) rose significantly to RM101.5 million (FY2006: RM20.9 million), mainly attributed to deposits received from the sale of condominiums during the year. BLand’s revenue however, continued to drop in FY2007, recording RM538.4 million for the year, primarily due to lower property sales under the property division. Its debt-to-equity (D/E) ratio rose marginally to 1.13 times in FY2007 compared to the previous financial year with the drawdown of the EB. Subsequently, its D/E ratio improved to 0.80 times as of 31 October 2007.

BLand registered an improved revenue and earnings performance of RM325.7 million and RM362.5 million respectively in the first half of FY2008. The improvement in revenue was mainly due to higher property sales recorded by the property development division after a period of slower sales in FY2007. The substantial improvement in pre-tax profit, compared to FY2007’s pre-tax loss, was mainly attributed to exceptional gains on asset and investment disposals, higher property development earnings and higher equity-accounted profits of associated companies (mainly from BToto).

BToto shares pledged in the Share Charge/Cash Account as at 4 February 2008 accounted for 21.3% of the total 1,258.0 million ordinary shares (excluding treasury shares) of BToto in issue, above the 18.0% required under the terms of the issuance. Moreover, the value of the shares pledged is 160% of the nominal amount of the EB, well above the 130% required under the terms of the issuance.

Major Rating Factors

Strengths

• Strong financial performance of Berjaya Sports Toto Berhad (BToto), the shares into which bonds are exchangeable;
• The collateral cover of 130% afforded by BToto shares charged against the nominal value of the exchangeable bonds with top-up requirements; and
• Adequate interest coverage of 1.2 times by dividends paid on the pledged shares of BToto.

Challenges/ Risks

• Potential changes in government regulations and gaming legislation;
• Market risk arising from price volatility of BToto shares;
• Berjaya Land Berhad’s lacklustre financial position; and
• Cyclical nature of its property development operations as well as the challenges faced by its overseas projects.