Diversified Venue Sdn Bhd - 2011

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 the Mercu UEM building, which houses UEM Group Berhad’s (UEM) corporate headquarters, from First Impact Sdn Bhd (FISB). The affirmed rating reflects the credit strength of UEM as the liquidity support provider for the sale-and-leaseback transaction between DVSB and FISB, a wholly-owned subsidiary of UEM. MARC continues to maintain a public information senior unsecured rating of AA on UEM based on the group’s strong profitability and favourable financial flexibility stemming from a well-diversified business profile and the strength of its ultimate shareholder, Khazanah Nasional Berhad (Khazanah), the government’s investment arm. These positive factors are, however, moderated by the susceptibility of UEM’s core businesses of engineering, construction and property to industry cycles.

DVSB, a wholly-owned subsidiary of FISB, had entered into a sale-and-leaseback agreement with FISB for the Mercu UEM building for a period corresponding to the tenure of the programme.  Lease rentals from the lessee, FISB, constitute the profit payments on the sukuk, with any shortfalls to be met by UEM through an undertaking to provide liquidity support for the transaction.  In addition, 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.

The Mercu UEM building has been occupied since January 2009 mainly by UEM group of companies and Khazanah. The current rental rate is RM7.00 per square feet with a tenancy term of three years, after which the rental rates will be revised based on prevailing market rates.   

MARC notes that a holding company level analysis reveals UEM’s strong liquidity position with an available cash balance of RM510.1 million as at December 31, 2009 (FY2009) due mainly to increased dividend income contribution from its expressway division, headed by 38.5%-owned PLUS Expressway Berhad (PLUS). Dividend income from PLUS rose by 10.3% to RM321.7 million (FY2008: RM291.5 million) and was RM336.9 million for the eight months ended August 31, 2010. UEM has recently proposed to acquire all the assets and liabilities of PLUS via a special purpose vehicle to be held by UEM and the Employees Provident Fund (EPF) with shareholding of 51% and 49% respectively. While the details of the purchase of PLUS are yet to be finalised, MARC expects that steady dividend income will continue to flow from its expressway division and be a major liquidity source for UEM. The sale of its healthcare subsidiary Pharmaniaga Bhd for RM534 million is expected to be concluded by end-2010. 

On a consolidated basis, UEM group’s revenue moderated by 4.7% to RM8,214 million in FY2009 (FY2008: RM8,616 million) while pre-tax profit rose marginally by 1.1% to RM1,927 million (FY2008: RM1,906 million). The group’s main revenue contributor remains the expressway division, but lower contribution from its construction division and property division which had deferred launches of new phases in its ongoing projects led to revenue decline in FY2009. The construction division, which has an outstanding total order book value of RM3.9 billion as of June 30, 2010, has been affected by delays in the commencement of new projects. The property division, spearheaded by UEM Land Holdings Bhd (ULHB), is currently focused on developments in Nusajaya in Iskandar, Johor, but is expanding outside of this region with the acquisition of land parcels in Selangor and with the proposed takeover of property developer Sunrise Bhd which has been focused in the Mont’ Kiara vicinity in the Klang Valley. With a total gross development value of RM30 billion for its ongoing projects, MARC expects meaningful contribution from the property division. UEM group’s gearing position remains unchanged at 1.18 times as of December 31, 2009 (FY2008: 1.18 times); however, a significant 82% of its total borrowings of RM14.4 billion (FY2008: 83%) are related to concession assets.

The stable rating outlook reflects MARC’s 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.

Major Rating Factors

Strengths

• Resilient credit strength of UEM Group Berhad (UEM) as the liquidity support provider; and
• Indirect subsidiary of Khazanah Nasional Berhad 

Challenges/Risks