Diversified Venue Sdn Bhd - 2007

MARC has affirmed its AAIS rating on Diversified Venue Sdn Bhd’s (DVSB) RM200 million Sukuk Al-Ijarah Master Programme (Sukuk). The rating outlook is stable. The Sukuk programme is a structured transaction involving DVSB acquiring the beneficial ownership in the land and building designated as the UEM Group Berhad (UEM Group) Headquarters’ Building (the Building) from First Impact Sdn Bhd (FISB) with the proceeds from the Sukuk. Subsequently, DVSB will lease the Building back to FISB under a Master Ijarah Agreement for a tenure which corresponds to that of the Sukuk. Repayment of the Sukuk will be funded by the periodic lease payments made by FISB as well as proceeds received from UEM Group pursuant to Sales or Purchase Undertaking provided by UEM Group. Furthermore, UEM Group has undertaken, pursuant to the Liquidity Facility Agreement, to provide financial support to FISB to meet its Sukuk service obligations, if necessary. FISB will be responsible for all costs and expenses relating to the Building and will remain as the legal owner of the Building. FISB has fulfilled its lease payment obligations in a timely manner enabling DVSB to meet its quarterly payment of profit totaling RM1,032,164 on December 28, 2007. As at 5 November 2007, overall construction progress was slightly ahead of schedule, at 81.75%, with expected completion by June 1, 2008.

The affirmed rating and rating outlook are principally based on the credit quality of the Liquidity Support Provider and Purchase Undertaking Provider, UEM Group under the Sukuk programme. UEM Group’s implied senior unsecured rating of AA, in turn, reflects its well-diversified business profile, strong profitability and liquidity, as well as majority ownership by Khazanah Nasional Berhad. The rating, however, is moderated by the UEM Group’s exposure to the performance of the engineering and services, property, construction and cement manufacturing segments which tends to be correlated. These segments collectively contributed 49.4% of its revenue in FY2006.

DVSB is a wholly-owned special purpose vehicle of FISB, a wholly owned subsidiary of UEM Group. UEM Group is a conglomerate whose principal activities span construction, expressway operation, engineering and services, healthcare  and cement  manufacturing. UEM Group also holds either significant or majority stakes in several listed companies namely UEM World Berhad, Plus Expressways Berhad, Pharmaniaga Berhad, UEM Builders Berhad, Cement Industries of  Malaysia Berhad, Opus Group Berhad (through UEM

World Berhad), Faber Group Berhad, Time Engineering Berhad and Time Dotcom Berhad (through Time Engineering Berhad). Being an investment holding company, UEM Group derives most of its revenue from dividend upstreaming by its operating subsidiaries.

In FY2006, UEM Group’s revenue increased by 32% to RM7.02 billion on the back a RM268.1 million gain from the disposal of two pieces of land in Bandar Nusajaya as well as the commendable performance of the engineering and construction division, which is represented by UEM Builders Berhad. The Group recorded a profit before tax of RM1.35 billion in FY2006, which is 18.2% up from FY2005. Net cash flow from operation, however, dropped 24% to RM1.45 billion in FY2006 due to an increase in cash payments to suppliers and the absence of compensation received by PLUS Expressway Berhad from the government in respect of the closure of Senai toll plaza. UEM’s expressway division accounted for approximately 80% of the group’s total borrowings. The Group’s borrowings are skewed towards long term debt, to match the long-term nature of the expressway concession.

Major Rating Factors

Strengths

• Strong credit quality of the liquidity support provider and purchase undertaking provider, UEM Group Berhad; and
• Strong ultimate shareholder i.e. the Government of Malaysia’s (GOM) investment-holding arm, Khazanah Nasional Berhad (Khazanah).

Challenges/Risks

• Cyclical nature of the civil engineering and services, property, construction and cement manufacturing industry of UEM Group Berhad