Harum Intisari Sdn Bhd - 2008

MARC has affirmed the MARC-1ID(cg)/AA-ID(cg) ratings on Harum Intisari Sdn Bhd’s (HISB) Al-Murabahah Commercial Papers (MCP)/Medium Term Notes (MMTN) with a nominal value of up to RM300 million. The ratings carry a stable outlook. The ratings and ratings outlook reflect the credit quality of guarantees extended by HISB’s holding company, Gamuda Berhad (Gamuda), a leading construction company in Malaysia with an established track record. MARC has affirmed its public information (pi) senior unsecured obligation ratings of MARC-1/AA- on Gamuda based on its strong business and financial profiles, backed by its sizeable outstanding construction order book and diversified earnings base. HISB’s stand alone credit profile has improved since our last rating review, supported by sustained demand for its property offerings as well as operational support from Gamuda. Offsetting these credit positives are HISB’s high debt leverage, project concentration risk and the increasingly tough operating environment faced by property developers.
  
HISB, a wholly-owned subsidiary of Gamuda, is involved in the development of the RM3.4 billion integrated township known as Bandar Botanic located in Klang, Selangor. HISB has developed 73.2% of the land size and has achieved an average take-up rate of 91.2% which translated to total sales of RM1.8 billion as of May 31, 2008. Out of the total units sold, 52.1% of the total sales value was accounted for by link houses which achieved almost 100% take-up. Still, MARC believes the maturing township could face challenges in its new launches, which include higher value properties, due to softening demand in the domestic property.

In the financial year ended July 31, 2007 (FY2007), the company posted a marginal increase in revenue to RM274.3 million attributed to higher demand over the year (FY2006: RM258.8 million), with its operating profit margin registering a growth of 18.7% in FY2007 (FY2006: 17.2%). HISB also recorded positive cash flow from operations (CFO) of RM130.6 million on the back of lower inventories and receivables and improved revenue after registering negative CFO consistently since FY2004. Aided by sustained sales and higher progress billings from its residential and commercial development, HISB, for its first ten months interim results ended May 31, 2008 reported a revenue of RM226.8 million with a pre-tax profit of RM59.7 million, higher than its FY2007 full year pre-tax profit of RM41.1 million. As of May 31, 2008, its debt-to-equity ratio (DE) stood at 1.2 times, significantly lower than its covenanted cap of 3.0 times.

Gamuda’s revenue and pre-tax profit improved to RM2.40 billion (FY2007: RM1.52 billion) and RM470.8 million (FY2007: RM276.6 million) respectively for the year ended July 31, 2008 (FY2008). As of July 31, 2008, Gamuda’s engineering and construction (E&C) division remained the group’s main revenue contributor, with an outstanding order book of RM9.5 billion. The group’s township developments as well as infrastructure and water concessions continue to provide diversification to Gamuda’s earnings and cash flow. Gamuda’s DE of 0.59 times as of FY2008, meanwhile, remained consistent with its rating band. The group’s net gearing ratio after netting off cash and cash equivalents stood at 0.32 times as of FY2008.

The stable rating outlook reflects MARC’s expectations that Gamuda will maintain its business and financial risk profile within the construction sector locally and regionally despite the uncertain outlook for the sector.

Major Rating Factors

          Strengths

• Unconditional and irrevocable corporate guarantee by ultimate holding company, Gamuda Berhad; and
• Strategically located within the new development hub of Klang.
  
  Challenges/Risks
  
  
•  Project concentration risk and high debt leverage; and
• Subdued near-term outlook for property demand.