OSK Property Holdings Bhd - 2008

MARC has affirmed its AID and A-ID ratings on OSK Property Holdings Berhad’s (OSKP) RM50 million Class A BaIDS and RM50 million Class B BaIDS respectively; and revised the outlook to stable from negative. The affirmation and outlook revision reflect OSKP’s improved debt protection measures with respect to both Classes of BaIDS as a result of its partial redemption of Class A BaIDS in April 2008 and adequate liquidity relative to scheduled debt maturities. Its liquidity position which had been bolstered by new equity issuance and long-term borrowings in the financial year ended December 31, 2007 (FY2007), benefited from better operating results in FY2008 and modest growth-related capital spending. Its high-margin property projects, namely Mon’t Jade in Seremban and Taman Sri Banyan (TSB) in Kajang, continued to perform well in FY2008 while future estimated billings from contracted sales in respect of its 2,563-acre Bandar Puteri Jaya (BPJ) township in Sungai Petani impart stability to its revenue profile. Offsetting these credit positives are cyclical nature of its property development business, its aggressive acquisitions approach with respect to landbank as well as a subdued FY2009 outlook for property sales.

OSKP, a Bursa Malaysia listed property company, is a related company of OSK Holdings Berhad, a comprehensive financial services provider. OSKP has 2,805.7 acres of land with an estimated gross development value (GDV) and estimated gross development cost (GDC) of RM4.4 billion and RM3.2 billion respectively as of June 30, 2008. Its flagship development, BPJ, was launched in 1999 and has sold 4,873 units worth RM593.8 million as of June 30, 2008. Sales from its BPJ development have been identified as the main source of repayment for the BaIDS.

To reduce its dependency on BPJ, OSKP has locked in a small number of property developments within the Klang Valley for the intermediate term and which carry a total GDV and total GDC of RM1.6 billion and RM1.2 billion respectively. In addition, the group has also ventured into property investment through the acquisition of The Atria, a shopping mall in Damansara Jaya, Selangor for RM75 million and completion of a self-constructed hypermarket warehouse in BPJ. MARC expects rentals from these properties will provide OSKP with a recurring but not significant income.

For the full year unaudited results ended December 31, 2008 (FY2008), OSKP’s operating profit margin rose to 18.3% (FY2007: 15.0%) backed by higher margin properties sold in TSB and Mon’t Jade as well as semi-detached houses and shop offices in Phase 3 of BPJ. In the same period, the group recorded a positive operating cash flow of RM8.3 million, a turnaround from the previous negative cash flow of RM81.7 million in FY2007. This was attributable to higher progress billings from its BPJ project, Mon’t Jade and TSB projects, coupled with lower capital expenditure incurred in FY2008 as compared to FY2007. With the redemption of RM25.0 million Tranche 1 Class A BaIDS in April 2008, OSKP’s debt-to-NTA ratio stood at 0.33 times in FY2008 (FY2007: 0.29 times). Further, the BaIDS have a security coverage of 2.99 times as of June 30, 2008 (as measured by the ratio of estimated future remaining billings arising from contracted sales of BPJ development to the outstanding Class A BaIDS), well above its covenanted level of 1.43 times. As of December 31, 2008, OSKP’s outstanding RM25 million Tranche 2 Class A BaIDS are fully cash backed by the balance in a sinking fund account. MARC believes that OSKP is on track to fund its RM25 million final redemption of its Class B BaIDS in April 2010 based on its cash position as of end-FY2008 and projected remaining billings from contracted sales in respect of its BPJ development.

The challenges OSKP faces revolve around the sustainability of demand for property amid the tough housing environment in the short term.

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