Horizon Hills Development Sdn Bhd - 2011

MARC has affirmed its ratings on Horizon Hills Development Sdn Bhd’s (Horizon Hills) Islamic Bank Guaranteed Medium-Term Notes (IMTN) programme of up to RM200 million and Islamic Commercial Papers (ICP) Programme of up to RM70 million at AAAID(bg) and MARC-1ID(s) respectively. The IMTN programme is unconditionally and irrevocably guaranteed by Public Bank Berhad. The AAA rating on the IMTN programme reflects MARC’s public information rating on Public Bank premised on the bank’s well-established domestic franchise, strong asset quality, resilient recurring earnings and sound capitalisation.

The MARC-1 rating for the ICP programme reflects MARC’s public information corporate credit rating on Gamuda Bhd and UEM Land Bhd, both of which have provided unconditional and irrevocable undertakings in proportion to their shareholding in Horizon Hills to meet any financial obligation under the rated debt of up to RM280 million. UEM Land and Gamuda have also committed to provide equity contributions of up to RM30.0 million collectively to fund any cash flow deficit in Horizon Hills and/or to meet financial covenants under the rated facilities. The outlook on the ratings is stable which incorporates the outlooks for UEM Land, Gamuda and Public Bank.

Horizon Hills, which is jointly-owned by Gamuda and UEM Land, is developing a 1,228-acre mixed-residential project in Nusajaya, one of the five flagship zones in Iskandar, Johor. Launched in 2007, the project has an estimated gross development value (GDV) of RM4.15 billion. As at end-August 2011, Horizon Hills’ completed projects are fully sold while its ongoing projects have achieved an average take-up rate of 74.5%, the majority of which were launched in 1Q2011. The healthy sales performance is attributable to the strong reputation of the project’s sponsors, namely Gamuda and UEM Land in property development, the initial pricing strategy of targeting the medium-cost market and the attraction of the fast-growing Iskandar region. MARC believes that the project has also benefited from its close proximity to Singapore, as reflected in foreigners comprising 45% of all purchasers. Notwithstanding these factors, MARC expects stiff competition to Horizon Hills’ upcoming phases from several ongoing developments in nearby locations in the Iskandar region.

Horizon Hills has a remaining land bank of 800 acres for development and has earmarked to launch 227 units by 1H2012 with an estimated gross development value (GDV) of RM302.8 million. MARC notes that the company’s total unbilled sales of RM252.9 million as at end-August 2011 will provide near-term earnings visibility. For financial year ended December 31, 2010 (FY2010), Horizon Hills registered revenue of RM164.0 million (FY2009: RM155.6 million) and profit before tax of RM31.6 million in FY2010 (FY2009: RM32.5 million), while operating cash flow rose significantly to RM68.6 million (FY2009: RM13.3 million) mainly on account of a sharp decline in inventories. The company’s debt-to-equity ratio declined to 1.29 times in FY2010 (FY2009: 1.57 times).

MARC views both shareholders, Gamuda and UEM Land, to have the resources to continue to lend support to Horizon Hills. UEM Land derives its credit strength from its parent, Khazanah Nasional Berhad, the government’s investment holding company and the main promoter of the Iskandar development. UEM Land is undertaking several large-scale projects in Iskandar that includes the Johor state government administrative centre. Gamuda has a fairly diversified business profile with strong market position in the construction and infrastructure sector. The group’s recent financial performance has been characterised by strong operating margins and steady recurrent earnings from its concession assets.

Major Rating Factors

Strengths

• Bank guarantee for the long-term facility and shareholders’ undertaking for the short-term facility; 
• Strong backing from shareholders for the development; and
• Strong sales performance.

Challenges/Risks

• Single project concentration risk.