Berjaya Land Bhd - 2010

MARC has affirmed its A rating on Berjaya Land Berhad's (BLand) Secured Exchangeable Bonds due 2011 with the rating outlook maintained at stable. The rating action is premised on the strong collateral coverage afforded under the bond issue structure in which BLand has to maintain at least 130% collateral coverage in the form of pledged shares in its gaming subsidiary, Berjaya Sports Toto Berhad (BToto), and cash against the nominal value of the outstanding bonds throughout the tenure of the issue. The underlying exchangeable bonds are secured by 242,302,097 ordinary shares of BToto, translating to a strong security cover of 141% as of August 15, 2010. The bonds will be exchangeable into BToto ordinary shares until August 15, 2011 at an exchange price of RM4.24 per share, reset on August 15, 2010. Conversion of the exchangeable bonds into shares in the intervening months to maturity could alleviate refinancing pressure, although MARC notes that there has been no conversion to date. BToto’s share price has been subdued following the 2% increase in pool betting duty for number forecasting operators (NFO) effective June 2010. MARC believes that conversion prospects have improved following a downward revision in prize payouts for certain categories of 4D prizes that may mitigate the negative impact on profitability from the pool betting duty hike.

BLand, which is part of Berjaya Corporation Berhad’s group of companies, is an investment holding company mainly involved in gaming (BToto), property development and property investments and leisure-related activities. As an investment holding company, BLand continues to be largely reliant on dividend income to meet its operational and financial obligations. MARC notes the quantum of dividend upstreamed in recent years has been inconsistent, declining sharply by 57% to RM158.40 million in FY2010 (FY2009: RM367.74 million). Cash retained at the holding company level remains modest (FY2010: RM2.8 million) relative to BLand’s sizeable upcoming debt maturity of RM888.3 million as at end-FY2010. Consequently, MARC expects BLand to initiate timely refinancing of the outstanding RM711 million of exchangeable bonds maturing in August 2011. MARC believes BLand’s debt leverage as measured by its debt-to-equity (DE) ratio of 0.29 times as at end-April, 2010 and its dividend income stream should support its refinancing of the exchangeable bonds in 2011. Additionally, any potential repayment of loans from subsidiaries owed to BLand which collectively amounted to RM1.8 billion as at end-FY2010 could strengthen BLand’s repayment capacity.
 
BLand’s property-related activities have remained relatively subdued during the financial year ended April 30, 2010 (FY2010). The gaming division continued to generate the larger part of consolidated earnings, accounting for about 90% of the group operating profits by segment for FY2010. For 1QFY2011, BToto’s operating profit declined by 22.1% to RM110.6 million (1QFY2010: RM141.9 million) due mainly to the higher pool betting duty levied on BToto’s gross profit as well as persistent competition from illegal NFO operators. The decline in BToto’s profitability was reflected in lower cash flow generated from operating activities of RM112.9 million in 1QFY2011 (1QFY2010: RM120.8 million). BLand’s consolidated earnings in fiscal 2011 will likely be dampened by the higher pool betting duties, although this is mitigated by an approval from authorities to lower 4D game prize payouts for certain categories of prizes.
 
BLand’s domestic property sales generated revenue of RM309.9 million in FY2010 (FY2009: RM102.1 million), but with unbilled sales of RM152.9 million compared to RM38.7 million a year ago, the property division’s earnings will likely trend downwards in FY2011. The division has embarked on property development projects abroad, principally in Vietnam, Korea and China. Nevertheless, its foreign projects are not expected to generate meaningful near-term returns as they are still in the early stages of development.

BLand’s overall improvement in its consolidated profit after tax to RM309.8 million (FY2009: RM100.3 million) in FY2010 was mainly due to higher investment-related income of which RM66.8 million (21.6%) was accounted for by write-backs of prior-year impairment losses. MARC notes that for 1QFY2011, the group reported a lower consolidated operating margin of 12.1% (1QFY2010: 14.1%) mainly due to the impact on BToto’s operating profits from the increased pool betting duty. BLand’s debt leverage as measured by its consolidated DE ratio improved to 0.37 times in 1QFY2011 (FY2010: 0.39 times), bolstered by sizeable equity of RM7.9 billion (FY2010: RM7.8 billion) and lower total borrowings of RM2.9 billion (FY2010: RM3.0 billion).

BLand has continued to maintain nominal liquidity at company level relative to the size of its upcoming debt maturity and total borrowings. Its cash and cash equivalents as at end-April 2010, meanwhile, stood at RM2.8 million. The affirmed rating assumes that BLand will raise sufficient liquidity to retire the bonds in subsequent months, either by one or more of the following avenues: refinancing, disposal of investments, and repayment of advances by subsidiaries. MARC will monitor the progress of BLand in raising funds to meet its August 2011 bond redemption and conversion activity in the intervening months to August 2011 to ensure that the assigned rating remains appropriate.

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