FORTUNE PREMIERE SDN BHD - 2017

MARC has assigned a rating of AA_IS to Fortune Premiere Sdn Bhd’s (Fortune Premiere) RM3.0 billion Multi-Currency Islamic Medium-Term Notes Programme (Sukuk Murabahah). The outlook on the rating is stable. The assigned rating applies only to ringgit-denominated notes issued under the multi-currency sukuk.

Wholly owned by IOI Properties Group Berhad (IOI Properties), Fortune Premiere is a special funding vehicle set-up to undertake the sukuk issuance. The assigned rating reflects the credit strength of IOI Properties which will provide an unconditional and irrevocable corporate guarantee on the sukuk. The sukuk programme is established as a funding conduit for general purposes; the issuer may initially issue up to RM300 million under the programme. IOI Properties’ credit profile incorporates its strong competitive position as reflected by its established brand name and track record of developing several townships in the Klang Valley and Johor. The group’s strong balance sheet, characterised by a low-to-moderate leverage position and healthy liquidity level, is a key rating factor.

IOI Properties has registered strong sales growth and high profitability margins through domestic property cycles. The group is also exposed to Singapore and China’s property industry, but this risk is largely mitigated by the group’s limited number of projects in both countries. In Singapore, IOI Properties has a single ongoing project, Trilinq, which has a GDV of RM3.1 billion. The project was completed in June 2017 and has achieved sales of 90% as of date. In Xiamen, China, the group’s two residential developments IOI Park Bay and IOI Palm City which have GDV of RM0.9 billion and RM1.3 billion respectively have been fully sold. The group has planned for its third project in Xiamen with the acquisition of a 6.2-acre land parcel in August 2016 for RM1.4 billion.

Overall take-up rates for ongoing domestic projects was modest as at end-March 2017. Nevertheless, its low land cost has meant that the group’s projects generally have low breakeven levels, allowing for stronger holding ability. There has been no significant change in its development approach domestically; as in the past, the group focuses on developing self-contained townships, which also allows for differentiated offerings both in terms of property type and price. Its notable townships projects include 16 Sierra, Bandar Puchong Jaya and Bandar Puteri Puchong in Selangor, and Bandar Putra Kulai in Johor. As at end-March 2017, total remaining GDV of ongoing domestic projects stood at RM4.3 billion, spread across 13 townships. IOI Properties has about 9,800 acres remaining land held for development, of which about 5,200 acres are in existing townships.

IOI Properties has exhibited strong revenue and earnings growth over the last five years from its three major business segments: property development, property investment, and leisure & hospitality. For financial year ended June 30, 2017 (FY2017), these segments accounted for 89.3%, 9.5% and 1.2% of operating profit respectively. Operating profit margin remained favourable at 33.0% against industry average of about 16%, attributable to low land costs for domestic projects, economies of scale and improving contribution from its property investment segment. FY2017, IOI Properties incurred a one-off additional buyer stamp duty, equivalent to RM163.8 million, imposed by Singapore for a delay in the sales completion of the Trilinq project. IOI Properties has a strong liquidity position with cash holdings of RM2.4 billion as at end FY2017, about RM1.6 billion net of amounts held under housing development accounts.

MARC notes that the 2.69-acre Central Boulevard land acquisition for SGD2.57 billion (about RM7.77 billion) through wholly-owned subsidiary Wealthy Link Pte Ltd. has led to a spike in group borrowings to RM12.5 billion as at end-FY2017. The rating agency understands that an ongoing plan to sell down a 33% stake in Wealthy Link to Hong Kong Land Holdings Limited and a subsequent deconsolidation exercise will result in a pro-forma debt-to-equity of 0.31 times. The Central Boulevard development will be retained as investment property, and will be added to the group’s investment portfolio of nine office buildings and three retail malls with a total net lettable area of above 5.6 million sq ft. In FY2017, the group’s investment properties which were about 80% occupied, contributed approximately RM171 million to operating income.

The stable outlook reflects MARC’s expectations that IOI Properties’ credit metrics would remain commensurate with its current rating band. Pressure on the rating would emerge if take-up rates for its domestic developments continue to remain low and/or if borrowings level increase such that debt coverage weakens sharply over the near term.

Major Rating Factors

Strengths

• Major developer of several townships in Malaysia;
• Diversified property business comprising property development and investment, and leisure & hospitality;
• Strong sales growth and profitability margins supported by low land cost; and
• Strong take-up for ongoing overseas developments in China and Singapore.

Challenges/Risks

• Slowdown in the domestic property sector; and
• Exposure to China and Singapore property markets.