Mega Palm Sdn Bhd - 2010

MARC has affirmed its AAA(bg) and MARC-1(bg) ratings on property developer Mega Palm Sdn Bhd’s (Mega Palm) Bank Guaranteed Medium Term Notes (BG MTN) of up to RM70.0 million and Bank Guaranteed Commercial Papers (BG CP) of up to RM80.0 million respectively. The outlook for the ratings is stable. The affirmed ratings and stable outlook are based on MARC’s public information ratings of AAA/MARC-1 on Malayan Banking Berhad (Maybank) which has provided an unconditional and irrevocable guarantee on the MTN and CP. Maybank’s current rating reflects the bank’s leading market position in Malaysia in terms of asset size, its sound asset quality, its resilient core earnings and its robust capital adequacy.

Mega Palm is the developer of a 196-acre freehold gated high-end residential project known as Country Heights Damansara (CHD) with an estimated gross development value (GDV) of RM1.0 billion. CHD is a low-density residential development resembling parent company Country Heights Holdings Berhad’s (CHHB) flagship development, Country Heights Kajang. Since launching the project in 2001, Mega Palm has sold 86% of its total 341 bungalow lots and large land parcels in CHD to external parties for residential and commercial developments. Sales have been relatively slow; since CHD’s initial launch through March 31, 2010, Mega Palm registered overall sales of only RM600.8 million, or 60.1% of expected GDV (April 30, 2009: RM546.8 million). Since MARC’s October 2009 review, Mega Palm has sold 10 bungalow lots and two bungalow houses as compared to the two bungalow lots and two land parcels sold in the last review period.

For financial year ending December 31, 2009 (FY2009) Mega Palm recorded significantly lower revenue of RM32.7 million (FY2008: RM72.4 million). The sale of two land parcels had contributed RM58.2 million, or 80% of FY2008’s revenue. Pre-tax profit in FY2009 declined to RM6.2 million (FY2008: RM19.0 million). Mega Palm’s debt-to-equity ratio increased slightly to 1.01 times (FY2008: 0.96 times) following the drawdown of BG CP of RM40 million to redeem the BG MTN and finance the construction of an access road to the Lebuhraya Damansara–Puchong (LDP). This new access road linking CHD directly to LDP is scheduled to be completed by December, 2010. Mega Palm’s cash flow from operations declined significantly to RM1.5 million (FY2008: RM50.5 million) in FY2009, mainly due to higher trade receivables and reduced land sales. However, Mega Palm’s year-end cash and cash equivalent rose to RM12.9 million from RM2.7 million a year ago on account of a net increase in borrowings.

Mega Palm’s future earnings will come from the development of bungalow lots/houses as well as 45 units of SOHO apartments which will provide an estimated GDV of RM273 million. MARC believes that apart from single-project concentration risk, Mega Palm’s performance is sensitive to unit and land sales volume. Mega Palm remains reliant on sustained recovery of market conditions to bolster its earnings and cash flow generation. Lower cash from receipts from unit and land sales could expose the company to funding gaps as its notes mature, particularly in 2011 when another RM30 million of its outstanding MTNs mature. MARC will continue to monitor the company’s efforts to address the funding gaps and potential refinancing risk.

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