UEM Land Holdings Bhd - 2012

MARC has assigned ratings of MARC-1IS /AA-IS to UEM Land Holdings Berhad’s (ULHB) proposed Islamic Commercial Paper (ICP) Programme and Islamic Medium Term Notes (IMTN) Programme with a combined nominal value of RM2.0 billion and a sub-limit on the ICP Programme of RM500 million in nominal value. The rating outlook is stable. The ratings reflect ULHB’s position as a strategic subsidiary of UEM Group Berhad (UEM). As such, the long-term rating of ULHB benefits from a one-notch rating uplift from its standalone rating on the basis of demonstrated parental support from UEM with which the subsidiary shares the same brand name and operates in a key business segment of the UEM group. MARC’s credit assessment of UEM, a wholly-owned subsidiary of Khazanah Nasional Berhad (Khazanah), incorporates its status as a government-owned entity as well as its diversified business and financial profile.

ULHB’s standalone credit profile incorporates its strong competitive position as the master developer of Nusajaya, an important component in the Khazanah-driven development of Iskandar Malaysia in Johor. Its position has been further strengthened by the recent acquisition of Sunrise Berhad (Sunrise), a developer with a longstanding track record in niche development in the Klang Valley. Moderating the ratings are the high susceptibility of ULHB’s earnings to property market cycles and large funding requirements needed for further development projects in Johor.

The proceeds from the issuance will be partly used for the redemption of the redeemable convertible preference shares (RCPS) in January 2013, repayment of existing borrowings and for working capital requirements. Bursa Malaysia-listed ULHB had issued the RCPS to part-fund the acquisition of Sunrise in early 2011. MARC notes that the operational and management integration post-acquisition have been completed. The acquisition of Sunrise in MARC’s view has enabled ULHB to widen its scope in property development activities outside of Iskandar Malaysia and at the same time mitigate project concentration risk. 

Nonetheless, Nusajaya, in which UEM Land Berhad (UEM Land), a wholly-owned subsidiary of ULHB, has about 6,572 acres of undeveloped land as at June 30, 2012, will continue to be ULHB’s major focus of property development activities. The group’s next major thrust is the 4,500-acre Gerbang Nusajaya mixed development, the first phase of which is expected to be launched in 2013.  MARC opines that the completion  of  key  catalytic  projects  in  Nusajaya,  including  Kota Iskandar,  Southern  Industrial and Logistics Clusters (SiLC), Legoland, Puteri Harbour as well as several educational institutions, could provide the critical mass to support demand growth. Notwithstanding this, MARC is concerned that the rapid pace of Nusajaya’s development could result in an imbalance between supply and demand dynamics. Aside from Nusajaya, the group’s other projects are mainly in Cyberjaya, Mont’ Kiara, KLCC area and Vancouver, Canada.  ULHB’s current launched gross development value (GDV) is RM5.2 billion and its total unbilled sales stood at RM1.9 billion as at June 30, 2012, which would provide medium-term earnings visibility.

For the six months ended June 30, 2012 (1HFY2012), ULHB registered a 16.9% and 52.6% increase in revenue and pre-tax profit to RM814.6 million and RM201.9 million respectively as compared to the previous corresponding period, due mainly to an increase in project launches. In FY2011, Sunrise had contributed 54% and 55% of ULHB’s revenue and pre-tax profit of RM1,703.2 million and RM355.2 million respectively. MARC notes that as a result of the Sunrise acquisition, contribution from the group’s property development activities, which increased to 74% in FY2011 (FY2010: 34%), is expected to dominate ULHB’s financial performance going forward with a corresponding decline in contribution from developed land sales (FY2011: 22%; FY2010: 61%).  In respect of future projects, MARC observes that cash flow projections are highly dependent on sustaining strong take-up rates, pricing and timing of launches.

Consolidated borrowings stood at RM1.2 billion as at end-1HFY2012 (FY2011: RM913.4 million), while the debt-to-equity ratio remained low at 0.23 times in 1HFY2012 (FY2011: 0.25 times).  At the holding company level, borrowings stood at RM152.9 million with debt-to-equity at 0.04 times as at end-FY2011. The holding company relies on dividend income for revenue; however, dividend upstreamed by subsidiaries has been irregular. For FY2011, no dividend was upstreamed (FY2010: RM64.4 million). Given that the proposed ICP/IMTN issuance will be undertaken at the holding company level, MARC expects dividends to be upstreamed to support profit and principal repayment. Additionally, ULHB could also draw on the financial strength of its parent, UEM, which in the past has provided support to ULHB to meet its financial obligations.
 
The stable rating outlook reflects MARC’s expectations that ULHB would be able to sustain its near-term operating performance, supported by the group’s status as a government-linked entity.

Strengths

Challenges/Risks