Diversified Venue Sdn Bhd - 2009

MARC has affirmed its AAIS rating on special purpose vehicle Diversified Venue Sdn Bhd’s (DVSB) RM200 million Sukuk Al-Ijarah Master Programme, with the rating outlook maintained at stable. The proceeds from the issue were used to fund the purchase of Mercu UEM, UEM Group Berhad’s (UEM) corporate headquarters, from First Impact Sdn Bhd (FISB). The affirmed rating reflects the credit strength of UEM, the intermediate holding company of DVSB, as the liquidity support provider for the sale-and-leaseback transaction with regard to the building. MARC continues to maintain a public information senior unsecured rating of AA on UEM, reflecting its strong profitability and favourable financial flexibility that benefits from a diversified business profile as well as the strength of its ultimate shareholder, Khazanah, the government’s investment arm. Moderating these strengths is the exposure of UEM’s engineering, construction and property divisions to the volatility of business cycles.

Upon issuing the sukuk, DVSB, a wholly-owned subsidiary of FISB, entered a sale-and-leaseback agreement with FISB for a period corresponding to the tenure of the programme.  The profit payments on the sukuk are funded by lease payments by FISB, with any shortfalls to be covered by liquidity support from UEM. Upon the maturity of each series of the sukuk, UEM will purchase the completed building parcel from DVSB at an exercise price having a value equal to the nominal amount for that series of Sukuk. MARC notes that FISB’s prompt payment of lease obligations continues to support timely payment of DVSB’s quarterly profit payments.

Located in KL Sentral on a 1.14-acre site, Mercu UEM is a freehold development with a net floor area of about 300,000 sq ft with a present average rental rate of RM7 psf. The corporate building has been occupied since January 2009 by UEM group of companies as well as Khazanah. 

At the consolidated level, UEM’s main revenue source is its expressway division, led by PLUS Expressway Berhad (PLUS), which has been able to generate consistent cash flow from its toll concession assets and has upstreamed dividends of RM321.7 million in FY2009 (FY2008: 291.5 million). In addition, UEM’s engineering and construction division, led by UEM Builders Berhad and Opus International (M) Berhad, has a respectable total order book value of RM2.5 billion as of June 30, 2009 that will provide earning visibility for the division in the near- to medium-term. The group’s property arm, UEM Land Berhad, currently owns 9,564 acres, or 40% of the total 23,875 acres of land in Nusajaya, one of the five flagship development areas in Iskandar, Johor.  Its major projects carry a total gross development value (GDV) of approximately RM32.0 billion, with total GDV sold amounting to RM1.6 billion as of June 30, 2009.

UEM group’s revenue and pre-tax profit remained resilient at RM8,619 million and RM1,919 million respectively in financial year ended December 31, 2008 (FY2008). The significant revenue recorded in the prior year was due to one-off gain for land sale to its holding company, Khazanah, pursuant to a de-gearing exercise. Its operating profit margin increased year-on year to 28.5% (FY2007: 27.5%) with its expressway division continuing to lead revenue contribution with 34%. In FY2008, the group recorded strong operating cash flow of RM2,434.9 million with cash and cash equivalents remaining adequate at RM3,072.4 million vis-à-vis its short-term borrowings of RM2,973.9 million.

At the company level, UEM’s liquidity is supported by available cash balances of RM232.6 million, which have notably declined from FY2007 levels of RM1.0 billion due to its acquisition of additional ownership interests in subsidiaries. Notwithstanding the foregoing, MARC believes the sizeable dividend income from PLUS will continue to buffer UEM’s liquidity position and provide relatively stable cash flows.

The stable rating outlook reflects the expectation that UEM will maintain its business and credit profile in line with the current rating in the near- to intermediate-term amid challenging economic conditions.

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