UEM SUNRISE BERHAD - 2017

MARC has affirmed its ratings of MARC-1_IS/AA-_IS on UEM Sunrise Berhad’s (UEM Sunrise) two Islamic Commercial Papers and Islamic Medium-Term Notes programmes (ICP/IMTN-1 and ICP/IMTN-2). The outlook on the ratings is stable. The ICP/IMTN-1 and ICP/IMTN-2 each has a programme limit of RM2.0 billion with a sublimit of RM500.0 million on the ICP issuances.

UEM Sunrise’s long-term rating incorporates a one-notch rating uplift for parental support from UEM Group Berhad (UEM Group) based on MARC’s support assessment which considers UEM Sunrise as a strategic subsidiary of its parent. UEM Sunrise is majority-owned by UEM Group, a government-related entity with diversified businesses and a strong financial profile. UEM Sunrise serves as the property arm of its parent. The standalone credit profile of UEM Sunrise reflects its longstanding record as a property developer, its diversified property projects with sizeable unbilled sales and moderate leverage position.

As at end-December 2017, UEM Sunrise’s total launched gross development value (GDV) of ongoing developments stood at around RM20 billion, of which about 52% is in Johor, 26% in the Klang Valley and 22% in Melbourne, Australia. As a master developer of the Iskandar Puteri flagship zone in Johor, UEM Sunrise has an established market position in the state, having undertaken several notable residential and commercial projects. This notwithstanding, the sharp slowdown in Johor’s property market has weighed on the group’s development activities. UEM Sunrise has had no new project launches in Johor in 2017; instead, it has focused its efforts on increasing sales of its existing projects. Over the near term, the group has plans to launch about RM275 million worth of projects in Iskandar Puteri, the majority of which will be priced in the affordable range where demand has been resilient. Additionally, the group’s third phase of the Southern Industrial and Logistics Cluster (SILC) project in Johor, comprising 193 acres with total estimated GDV of RM800 million, offers strong sales prospects. Phases 1 and 2 of SILC covering a combined net saleable area of 591 acres have been fully sold.

Both of UEM Sunrise’s ongoing developments in Melbourne, Aurora Melbourne Central (Aurora) (GDV: RM2.4 billion) and Conservatory (GDV: RM991 million), have been well received with the former fully sold and the latter having achieved a 93% take-up rate as at end-December 2017. Construction of both projects is as per schedule with an expected full delivery by 4Q2019. Its most recent project, Mayfair, a RM1.1 billion GDV high-rise development in Melbourne, was launched in September 2017. The build-and-sell nature of its Melbourne projects requires sizeable working capital, which has led to increases in the group’s borrowings in recent years. This is expected to abate as its key projects in Melbourne are nearing completion. MARC views that the group’s future projects in Melbourne could be affected by the increased regulatory risk including a 50% limit on foreign ownership and a new tax applicable to vacant properties since May 2017.

UEM Sunrise’s residential projects in Mont Kiara in the Klang Valley, Residensi 22 (GDV: RM971 million) and Residensi Sefina (GDV: RM307 million) recorded commendable take-up rates of 99% and 98% respectively at end-December 2017. Take-up for its most recent offering, Solaris Parq Residences (GDV: RM760 million), also has been encouraging at 50% as at end-December 2017 (launched in October 2017). The improved performance of its Mont Kiara developments has offset the modest performance of its Cyberjaya Symphony Hill project, which accounted for 39% or RM237 million of the group’s inventory book value of RM610 million as at end-December 2017. MARC also notes that inventory has grown at a slower pace of 4.2% y-o-y in FY2017 (2016: 45.2% y-o-y), reflecting some success in the group’s efforts to improve sales of its older projects.

For the financial year ended December 31, 2017, UEM Sunrise recorded improved revenue of RM2.9 billion and pre-tax profit of RM438.7 million (FY2016: RM1.8 billion; RM217.6 million), lifted by the completion of several large-scale projects such as Arcoris and Residensi 22 in the Klang Valley, as well as Teega and Bayu Angkasa in Puteri Harbour and Nusa Bayu, Johor respectively. Also contributing to the revenue growth was the ongoing construction progress of its major developments. Operating cash flow deficit narrowed to RM170.1 million (2016: negative RM698.9 million), supported by proceeds from the sales of the Alderbridge land parcel in Canada, Teega in Iskandar Puteri and Arcoris and Residensi 22 in the Klang Valley.

MARC views the group’s cash generation will improve over the near term, afforded largely through sale receipts from its key Melbourne developments which will be completed progressively over the next 12-24 months. Total borrowings stood at RM4.2 billion as at end-December 2017 (FY2016: RM3.7 billion), translating to a debt-to-equity ratio of 0.57 times. MARC understands that UEM Sunrise has plans to deleverage its balance sheet, through the repatriation of proceeds from sales of its Australian projects and other land sales. As at end-2017, UEM Sunrise’s contracted sales of RM4.8 billion (end-FY2016: RM4.1 billion) offers earnings visibility over the foreseeable future.

The outstanding notes under the ICP/IMTN-1 and ICP/IMTN-2 programmes currently stand at RM1.4 billion and RM1.2 billion respectively. UEM Sunrise’s liquidity position remains well supported with cash and cash equivalents of RM805.7 million, short-term investments of RM125.2 million and unutilised amounts under its IMTN programmes of RM1.4 billion against short-term maturing debt of RM1.5 billion.

The stable rating outlook incorporates MARC’s expectations that UEM Sunrise’s standalone credit profile would remain commensurate with its current rating band. The rating and outlook could 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 Berhad (UEM Group), a government-linked entity; and
• Strong track record in property development.

Challenges/Risks

• Working capital requirements for foreign projects; and
• Challenging prospects for property projects in Iskandar Malaysia, Johor.