Dutaland Bhd - 2009

MARC has downgraded the rating of DutaLand Berhad’s (DutaLand) outstanding RM50,666,528 Redeemable Unsecured Loan Stocks (RULS) to B from BB-. The outlook on the rating is negative. The rating action reflects DutaLand’s dependence on asset sales to meet its upcoming debt maturities and the significant near-term pressure on its profitability and cash flow. Against the background of the relatively slow property sales encountered by its property development segment and narrowed scope of its oil palm business following the disposal of a plantation subsidiary, MARC is of the opinion that operating profitability and cash flow generation will remain weak. The negative outlook assumes that management will seek to further realise asset sales within a compressed time frame, and highlights concerns about DutaLand’s ability to augment its limited cash liquidity which is currently insufficient to address the RM8.94 million due on the RULS as well as other maturing obligations.

DutaLand is now mainly involved in property development and palm oil plantations following a major restructuring exercise that was completed in 2007.  During the financial year ended June 30, 2009 (FY2009), the group disposed its plantation subsidiary Tingkayu Plantation Sdn Bhd (Tingkayu) for a cash consideration of RM152 million. The group has pared down RM191.0 million of its debt with the proceeds from the disposal of Tingkayu. With the sale of Tingkayu, DutaLand’s planted oil palm acreage has declined to 30,000 acres, with a mature area of 20,000 acres.

DutaLand’s major property project is currently the 73-acre Kenny Heights, a high-end development which has suffered from weaker sales and delayed launches due to challenging market conditions that prevailed in 2009. To date, only two parcels of the development’s total 9 parcels have been launched. As of June 30, 2009, parcel two, which comprises 49 units of four-storey villas with a gross development value of RM213.3 million, has achieved a take-up rate of 53% and a total sales value of RM130.3 million. In addition to slower sales during the year, MARC observes that there are no definite launch dates for the majority of its other parcels, which increases earnings uncertainty and limits prospects of meaningful improvement in earnings from the property division.

DutaLand’s revenue declined by 42.5% to RM100.5 million in FY2009 (FY2008: RM174.7 million) on the back of lower revenue contribution from the group’s plantation division with the sale of Tingkayu, reduced production volume and lower average selling prices of fresh fruit bunches. Profit before tax, however, increased by 33.2% to RM77.9 million mainly due to higher operating profit margin of 95.8% in FY2009 (FY2008: 44.3%) mainly arising from a RM83.4 million net gain on disposal of equity interest in Tingkayu and write back of provision for litigation claims amounting to RM21.3 million. Excluding the net gain from disposal of Tingkayu, MARC notes that DutaLand would have recorded a loss before tax of RM5.5 million in FY2009.

For the six months ended December 31, 2009 (1HFY2010), DutaLand’s revenue sharply declined by 41.0% to RM30.7 million (1HFY2009: RM52.1 million), mainly attributable to the absence of revenue contribution from Tingkayu. At the pre-tax profit level, DutaLand recorded a loss of RM4.7 million during the period as compared to a loss of RM13.9 million in 1HFY2009 due to higher forex gain, lower interest cost and impairment loss on investments, and higher gross profits from the Kenny Heights project. Notwithstanding that, development expenditure incurred for the project continues to absorb a significant amount of cash and places a strain on DutaLand’s operational liquidity. DutaLand reported negative cash flow from operations of RM11.2 million at the group level for the six-month period and a further decline in cash and cash equivalents to RM8.3 million from RM50.9 million at 1HFY2009. DutaLand’s cash and cash equivalents of RM8.3 million is inadequate to repay its short-term borrowings, including RM8.94 million of the rated facility due in April 2010, and RM16.1 million for its USD-denominated bonds in April 2010. MARC believes DutaLand may experience difficulty in meeting the above obligations when due and will take appropriate rating action as warranted.

Major Rating Factors

Strengths

Challenges/Risks