Putrajaya Holdings Sdn Bhd - 2014

MARC has affirmed its AAAIS and AAAID ratings with a stable outlook on Putrajaya Holdings Sdn Bhd’s (PJH) Islamic debt programmes as follows:-

• RM3.0 billion Sukuk Musharakah Programme (due 2032);
• RM1.5 billion Sukuk Musharakah Medium-Term Notes (MTN) Programme (due 2033); and
• RM2.2 billion Murabahah Medium-Term Notes (MMTN) Programme (due 2021).

The ratings are based on PJH’s healthy financial and business profile that is characterised by stable and sizeable rental income streams from subleasing government buildings in Putrajaya to the government and strong operating track record as the master developer of the federal government administrative capital in Putrajaya. The ratings also incorporate the strength of PJH’s government-linked major shareholders, namely Petroliam Nasional Berhad (Petronas) (through KLCC Holdings Sdn Bhd) and Khazanah Nasional Berhad.

MARC observes that PJH has expanded its scope of developments to include more commercial and residential projects in its development pipeline in Putrajaya. For 9M2014, PJH launched two projects with a total estimated gross development value (GDV) of RM114 million in addition to six launches with a GDV of RM594.7 million in 2013. MARC views that PJH’s shift in business focus to include commercial and residential components in its development exposes the group to higher market risks in light of prevailing weak property market sentiments. Nonetheless, PJH has been able to achieve a strong sales performance with a take-up rate of about 91% for its properties launched in 2013 and maintain low inventory levels.

In regard to government projects, PJH has submitted a proposal to develop a new government housing scheme under the 1Malaysia Civil Servants Housing Programme (PPA1M). The group is currently undertaking the construction of the 31-storey Ministry of International Trade and Industry (MITI) building in Kuala Lumpur under a build-lease and transfer agreement with construction cost of about RM342.0 million. Other buildings under construction are for the Ministry of Transport and Road Transport Department, Election Commission of Malaysia and Malaysian Anti-Corruption Commission. Upon the issuance of the Certificate of Practical Completion, these completed buildings will be subleased to the government for 25 years under the lease-and-sublease agreements between PJH and the Federal Land Commission. These will add to the total sublease rentals from government buildings which stood at about RM1.3 billion per annum as at end-March 2014.

MARC notes that rental income from subleased of government buildings continued to account for a significant portion of PJH’s consolidated revenue and pre-tax profit, although contribution from property sales has steadily increased. For the financial year ended December 31, 2013 (FY2013), lease rentals comprised 67.2% of total revenue followed by the sale of land and properties at 21.2% (FY2012:  77.2%; 8.2%). Total revenue and pre-tax profit rose by 15.8% and 7.7% year-on-year to about RM2.0 billion and RM799.2 million respectively in FY2013, largely due to higher lease rentals received from the government and higher sales of its commercial and residential properties launched during the year. However, group operating profit margin declined to 52.1% from 56.5% on higher construction costs. PJH’s cash generating ability remained steady in FY2013 with cash flow from operations (CFO) standing at RM1.1 billion. The company increased its dividend payout to RM264.0 million in FY2013 from RM88.0 million in FY2012. Should PJH continue to increase its dividend payout, its strong liquidity position would further be reduced.

MARC observes that aside from the RM2.2 billion MMTN programme, the sublease rentals have not been specifically assigned to meet the financial obligations under PJH’s recent Islamic debt programmes. This notwithstanding, rental streams from several identified government buildings have been earmarked to match the repayment profile of these programmes and are deemed to provide sufficient liquidity to meet financial commitments under the programmes. The group’s total borrowings have remained largely unchanged over the years, standing at RM5.7 billion at end-1QFY2014, with a debt-to-equity of about 0.94 times. The group’s borrowings could potentially increase to fund the construction of the MITI building. With the group’s cash and bank balances of RM1.5 billion as at end-March 2014 and unutilised credit lines of about RM2.8 billion as at end-September 2014 (including unutilised revolving credit of RM715.0 million), PJH is able to meet its upcoming financial obligations. 

The stable ratings outlook assumes that PJH’s credit metrics with respect to its cash flow and debt service coverage would remain consistent with the assigned ratings.

Strengths

• Predictable and stable rental receivables from subleasing buildings to the Malaysian government;
• Ownership by government-linked entities; and
• Projects spread out across property sub-segments

Challenges/Risks

• Increased leverage position; and
• Exposure to cyclicality of property industry.