CREDIT ANALYSIS REPORT

UEM SUNRISE BERHAD - 2015

Report ID 5254 Popularity 1721 views 13 downloads 
Report Date Apr 2016 Product  
Company / Issuer UEM Sunrise Bhd Sector Property
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Rationale

MARC has assigned ratings of MARC-1IS /AA-IS on property developer UEM Sunrise Berhad’s (UEM Sunrise) proposed RM2.0 billion Islamic Commercial Papers Programme and Islamic Medium-Term Notes Programme (ICP/IMTN-2) with a sub-limit of RM500 million for the ICP programme. Concurrently, the rating agency has affirmed its MARC-1IS /AA-IS ratings on UEM Sunrise’s existing RM2.0 billion Islamic Commercial Papers/Islamic Medium-Term Notes Programme (ICP/IMTN-1). The outlook on the ratings is stable.

UEM Sunrise’s long-term ratings benefit from a one-notch rating uplift for parental support from UEM Group Berhad (UEM Group), a government-linked company which is wholly-owned by sovereign wealth fund Khazanah Nasional Berhad. MARC’s assessment on the parental support considers UEM Sunrise as a strategic subsidiary of UEM Group based on its operations in a key business segment within the group, past parental support and shared brand name. In respect of the parent, the rating agency considers UEM Group’s status, diversified businesses and financial profile as its key strengths.

UEM Sunrise’s standalone rating incorporates the weakening prospects of its domestic property projects, particularly in Johor, and its moderate credit metrics. These factors are offset to some degree by its geographically diversified property projects and its financial flexibility stemming largely from its significant unencumbered land bank. The group’s domestic property developments were concentrated in Iskandar Puteri (previously known as Nusajaya), Johor. MARC understands that owing to softening property market sentiments, UEM Sunrise has scaled down its development plans in the state of Johor. The group launched only one project in Iskandar Puteri in 2015, namely the Estuari which consists of high-end landed properties with an estimated gross development value (GDV) of RM632 million.

MARC notes UEM Sunrise’s projects in the Klang Valley have fared better; Residensi 22, a high-end residential development in Mont’ Kiara which was launched in 2014, has achieved a take-up rate of above 90% as at end-December 2015. The group’s most recent high-rise development, Residensi Sefina (Sefina) in Mont’ Kiara, has registered a take-up rate of above 70% since its launch in June 2015. UEM Sunrise has unbilled sales of RM5.2 billion as at end-December 2015, which provide earnings visibility over the medium term.

UEM Sunrise has steadily expanded its property projects to Canada and Australia, which has somewhat offset the impact of the weakening domestic property market. As at end-December 2015, the group’s ongoing foreign projects accounted for about 15% of its total RM17.7 billion GDV. In Vancouver, the Quintet development has recorded a 98% take-up rate and was fully completed at end-2015. The group’s upcoming project Alderbridge in Vancouver will be a mixed development, with a GDV of C$470 million targeted to be launched in 2017. In Melbourne, the group has sold 99% of its 941 residential units in its 92-storey Aurora Melbourne Central (Aurora) development as well as an en bloc sale of 252 units of service apartments. The project has a total estimated GDV of A$770 million (RM2.1 billion). The group launched another high-end residential development, The Conservatory, in Melbourne in 3Q2015 with an estimated GDV of A$320.0 million. MARC notes that the group’s foreign projects are undertaken on a build-and-sell concept for the period of three years. This is expected to weigh on the developer’s cash flows over the medium term, resulting in the need to rely on external funding for the construction in the interim.

The group’s consolidated borrowings rose to RM2.8 billion as at end-December 2015 with the issuance of an additional RM300.0 million under its ICP/IMTN-1 programme. UEM Sunrise’s consolidated debt-to-equity ratio remained moderate at 0.38 times. Over the near term, MARC expects the leverage to increase to 0.45 times from the proposed issuance of RM500 million under the ICP/IMTN-2 programme.

For FY2015, UEM Sunrise recorded lower revenue and pre-tax profit of RM1.7 billion and RM343.0 million respectively (FY2014: RM2.7 billion; RM609.2 million) mainly due to the absence of land disposals and lower development income following the slower sales in the southern region. The group’s unencumbered cash balance stood at RM788.0 million as at end-FY2015. MARC regards the group’s sizeable unencumbered landbank of about 13,000 acres as at end-December 2015, the bulk of which is in Iskandar Puteri, to provide some financial flexibility, if need be.

The stable rating outlook incorporates MARC’s expectations that UEM Sunrise’s standalone credit profile would continue to commensurate with its current rating band. The standalone rating could be lowered if the group’s credit metrics weaken in the event of a protracted slowdown in the domestic property market. The rating and outlook could also be revised if parental support from UEM Group is assessed as weakening and/or if any material change affects the status or credit profile of the parent.

Major Rating Factors

Strengths

  • Property arm of UEM Group, a government-linked company;
  • Strong track record in property development; and
  • Reduced project concentration risk with geographical diversification.

Challenges/Risks

  • Working capital requirement for foreign projects; and
  • Exposure to property market cyclicality.
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