Syarikat Kapasi Sdn Bhd - 2010

MARC has assigned the ratings of MARC-1_(fg)/AAA_(fg) to property developer Syarikat Kapasi Sdn Bhd’s (SKSB) RM200 million Commercial Papers/Medium Term Notes (CP/MTN) Programme. The ratings carry a stable outlook. The assigned ratings and outlook are underpinned by the unconditional and irrevocable financial guarantee insurance policy provided by Danajamin Nasional Berhad (Danajamin) in relation to the CP/MTN Programme. MARC currently rates Danajamin’s financial strength as AAA/stable on the basis of its important role as Malaysia’s first and sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base, ample liquidity and conservative investment policy.

SKSB, a wholly-owned property development subsidiary of Asian Pac Holdings Bhd, is currently developing the second phase of a mixed development project known as Kota Kinabalu Times Square (KKTS) on a 15.45-acre site in Kota Kinabalu, Sabah. Proceeds of the CP/MTN issuance will be used to part-finance the construction and development costs of a four-level shopping mall with 2,400 parking bays, and single-and double-storey exterior shop lots under the second phase of KKTS (KKTS - Phase 2). In addition to the shopping mall and 41 units of exterior shop lots, KKTS - Phase 2 is also expected to comprise an estimated 498 serviced apartment units in five blocks. KKTS - Phase 2 is in the early stage of construction with completion expected in mid-2013. The total development cost of KKTS - Phase 2 is estimated at RM640.0 million (including land cost of RM119 million which has been fully paid), of which around RM47 million has been incurred to date, funded substantially by advances from related companies. Cash flow generated by KKTS - Phase 2 from the net sale proceeds of the service apartments and exterior shop lots, rental collections from the mall and car parking charges will provide the primary source of debt service repayment for the rated notes.

SKSB’s ability to service its obligations under the rated programme is ultimately supported by KKTS - Phase 2 project cash flows which in turn are subject to construction completion risks. Future cash flows are also vulnerable to lower-than-expected take-up rates for the exterior shop lots and serviced apartments, and lower-than-expected occupancy and rental rates for its mall. Furthermore, the relatively heavy dependence on single project cash flows introduces an element of concentration risk. MARC derives some measure of comfort from SKSB’s record of timely completion of commercial and retail properties  in  the first  phase of KKTS  and  Karamunsing  Capital, and  the  solid take-up rates for these properties. Notwithstanding the 100% take-up rates for these projects, the sustainability of demand for retail and commercial space is less certain in the medium term given the spate of ongoing new retail and commercial developments in the city. Net lettable area in the retail sector had doubled to 3.17 million sq ft between March 2008 and March 2010.

The company’s historical financial performance indicates an upward trend in reported profits between FY2006 and FY2008 since commencing development of KKTS - Phase 1 (Signature Offices), and later Karamunsing Capital. For financial year ended March 31, 2009 (FY2009), however, revenue declined to RM22.1 million (FY2008: RM107.2 million) as revenue was solely derived from the remaining progress billings in respect of Karamunsing Capital which was delivered in November 2009.

The company’s debt-to-equity (DE) ratio rose to 0.36 times in FY2008 on account of a RM66 million term loan to meet SKSB’s working capital needs for the construction of Karamunsing Capital and KKTS - Phase 1 but declined to 0.28 times as it pared down its term loan in FY2009. Assuming full drawdown of the proposed RM200 million CP/MTN programme and the absence of other bank borrowings on the company’s balance sheet, SKSB’s pro-forma DE ratio as at April 30, 2009 increased to 1.19 times. On-balance sheet liquidity is modest, as reflected by cash and cash equivalents amounting to RM3.5 million as at end-FY2009.

MARC considers the company’s near-term earnings visibility to be somewhat limited given its reliance on development revenue from its serviced apartments and exterior shop lots, although car park rental from its completed projects provide a modest recurrent earning stream. Notwithstanding this, noteholders are insulated from the downside risks in relation to SKSB’s credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

Major Rating Factors

Strengths

• Guarantee by Danajamin in respect of coupon/interest and principal payment obligations;
• Prime location of the development with close proximity to Kota Kinabalu city centre; and
• Ability to maintain control over tenant-mix at the mall.

Challenges/Risks

• Sustaining demand for high-end condominium segment in Kota Kinabalu; and
• Reliance on the sole property project, Kota Kinabalu Times Square.