Legolas Capital Sdn Bhd - 2008

MARC has affirmed the ratings of MARC-1(bg)/AAA(bg) on Tranche A and MARC-1(bg)/AA+(bg) on Tranche B of Legolas Capital Sdn Bhd’s (Legolas) RM105.0 million Commercial Paper / Medium Term Notes (CP/MTN) Programme and RM110.0 million CP/MTN respectively. The ratings reflect the irrevocable guarantees provided by Maybank for Tranche A and UOBM for Tranche B respectively. Maybank’s financial strength ratings reflect the bank’s long- and short-term dominant local market position and strong franchise value, sound financial profile, improved asset quality and sturdy capitalization. UOBM also has strong financials, supported by its stable funding and liquidity levels as well as an adequate capitalization position. The ratings carry a stable outlook.

Legolas, a special purpose vehicle, is 85.1% owned by Ireka Sdn Bhd (ISB), which in turn, is wholly-owned by public listed Ireka Corporation Bhd (ICB). The remaining 14.9% in Legolas is owned by MCDF Investment Pte Ltd, a company linked to CapitaLand Limited (CapitaLand). Legolas was incorporated for the purpose of jointly undertaking the development and construction of a mixed-development project known as ONE Mont’ Kiara in the upscale Mont’ Kiara vicinity in Kuala Lumpur. ICB is currently in the midst of transferring its entire shareholdings in Legolas to Aseana Properties Limited (APL), an investment holding company listed on the Main Market of the London Stock Exchange (LSE), following a group restructuring exercise in May 2007 which resulted in most of ICB’s property development assets (including ONE Mont’ Kiara) being sold to APL in exchange for a 19.57% stake in APL. Through its wholly-owned subsidiaries, ICB remains the main contractor and development manager of the ONE Mont’ Kiara project. The disposal of Legolas to APL is expected to be complete by 1Q2009, following which, the standalone credit profile of Legolas will be evaluated in line with APL’s risk profile.
 
With a total gross development value of RM538.5 million (USD157 million @ RM3.43/USD), the ONE Mont’ Kiara project comprises the development of a four storey retail complex, a 17 storey office tower, a 31 storey office suite and a four storey basement car park. CapitaLand, one of the largest listed real estate companies in Asia, is the project manager of ONE Mont’ Kiara. Launched in December 2006 and by January 2009, the office suites achieved a 75% take-up rate. The retail complex and office tower will be held as investment properties. As at January 2009, the project, which is slated for completion by 2011, was 41.7% completed.

ICB completed the disposal of its hotel operations in January 2007 and the disposal of its property development assets to APL in May 2007. Following the restructuring exercise, ICB’s core operations are largely construction with property development management. On a stand alone basis, rising construction material cost have hurt ICB’s bottom line.

For FY2008, approximately 86% of ICB’s revenue stemmed from its construction division. As at September 2008, the group’s outstanding order book stood at RM898.7 million comprising construction works for APL. Though there is concentration risk, current sales from the ONE Mont’ Kiara project is sufficient to cover the short term profit obligations of the programme. For the first half ended September 30, 2008 (1H2009), ICB registered a pre-tax loss of RM0.7 million attributed to the steep rise in construction raw materials prices and lower volume of completed construction works. Going forward, the construction division’s weaker performance will be offset by the annual recurring management fee from its property development management division, which is worked out at 2% of APL’s net asset value per annum. Following the disposals of its hotel and property development operations, the group received cash proceeds of about RM262.4 million which were partly used to refinance ICB’s borrowings. Between FY2006 and the financial year ended September 31, 2008, ICB successfully pared down approximately RM450.8 of its borrowings to a sum of RM112.3 million.

Major Rating Factors

Principal Activities

• Special Purpose Vehicle to fund the commercial development known as ONE Mont’ Kiara

Strengths

• Source of repayment from a mixed development project known as ONE Mont’ Kiara which had a take-up rate of 75% for its office suites as at January 2009; and
• Project management is by Southeast Asia’s largest property developer, CapitaLand Limited.

Challenges/Risks

• Main contractor Ireka Engineering and Construction Sdn Bhd (IEC) is susceptible to rising construction costs; and
• Slow down in the local property sector.