SEGI ASTANA SDN BHD - 2015

MARC has affirmed its rating of AAA_(fg) on Segi Astana Sdn Bhd's (Segi Astana) RM470.0 million Medium-Term Notes (MTN) programme with a stable outlook. The rating reflects the credit strength of the unconditional and irrevocable financial guarantee provided by Danajamin Nasional Berhad which carries MARC’s financial strength rating of AAA/Stable. Segi Astana is a special purpose vehicle majority owned by WCT Land Sdn Bhd (70%). The remaining 30% stake is held by Malaysia Airports Holdings Bhd (MAHB).

Segi Astana’s sole development, gateway@klia2, a component of Kuala Lumpur International Airport 2 (klia2), commenced operations in May 2014 and recorded a lower-than-expected occupancy level for its retail space. As at end-December 2015, occupancy level declined further to 71.5% (end-2014: 78.0%). Comprising a sizeable net lettable area (NLA) of 356,000 sq ft, the retail area has faced stiff competition from the adjoining airside mall in klia2 as well as from a nearby retail mall, Mitsui Outlet Park KLIA Sepang. In addition, the low population density within the Sepang vicinity has also hampered retail traffic growth. However, Segi Astana’s fairly diversified tenant profile, with the largest tenant occupying less than 7% of the NLA, mitigates tenant concentration risk. Segi Astana’s other two components of gateway@klia2, namely a multi-storey car park and a transportation hub, have fared better, providing the company with a captive income stream amounting to more than 30% of the company’s revenue in the first half of 2015 (1H2015).

For the unaudited 1H2015, Segi Astana recorded revenue of RM58.2 million as compared to RM81.5 million in 2014 (which constituted eight months of operations). Contribution from rental income declined marginally to 61.7% in 1H2015 (2014: 63.4%) due to a decline in the retail area occupancy level and the average gross rental rates. This has decreased to RM22.52 psf as at end-1H2015 (August 2014: RM23.30 psf). Occupancy is expected to increase from the current level following the expected completion of leasing negotiations with prospective tenants in 2016. High finance cost and operating leverage continued to weigh on the company’s profitability; the unaudited pre-tax profit of RM4.2 million indicated a low profit margin of 7.2% (2014: net pre-tax loss of RM1.6 million).

Segi Astana’s debt-to-equity ratio stood at a high 4.93x at end-1H2015 as the gateway@klia2 development was largely funded by debt. MARC’s sensitivity analysis on the company’s cash flow projections indicate that cash flows are highly susceptible to occupancy levels and rental rates: if occupancy levels are capped at 75% throughout the tenure of the programme and the rental rate increases are below projections at 5% at every three years, the average debt service coverage ratio would decline to 1.22 times. As at end-1H2015, cash and bank balances stood at RM53.1 million inclusive of cash deposits in the debt service reserve account for MTN interest payments, which is sufficient to meet the first principal redemption of RM30.0 million due on December 30, 2016.

Segi Astana has limited financial flexibility; however, MARC opines that any funding requirement will be supported by its major shareholder, WCT Land (WCTL). As at end-1H2015, WCTL has provided RM57.9 million of shareholder loans to support Segi Astana; the interest-bearing shareholders’ loan, however, is subordinated to the rated programme.

Noteholders are insulated from any downside risks related to the credit profile of Segi Astana by the irrevocable and unconditional guarantee provided by Danajamin. Any changes in the supported rating or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

Major Rating Factors

Strengths

• Captive market for car park and transportation hub at KLIA2.

Challenges/Risks

• Lower than projected occupancy rates for the retail mall; and
• Weak retail catchment area.