CENTRAL IMPRESSION SDN BHD - 2018

MARC has affirmed its AA- rating on Central Impression Sdn Bhd’s (CISB) 11-year Fixed Rate Serial Bonds of RM120.0 million. The rating carries a stable outlook. CISB is the owner of the AEON Klebang shopping mall (AEON Klebang) in Ipoh.

The affirmed rating reflects the credit strength of AEON Co. (M) Berhad (AEON), whose fixed lease payments to CISB as a principal lessee of the mall are deemed sufficient to meet the financial obligations under the bond issuance. The stable outlook reflects MARC’s expectation that AEON’s financial strength will remain supportive to meet its lease obligations. Downward rating pressure could develop if AEON’s credit profile weakens substantially due to an increase in leverage and/or declining profitability margins.

As at end-July 2018, AEON Klebang was about 90% occupied with the AEON departmental store occupying about half of the mall’s 506,000 sq ft of net lettable area (NLA). AEON operates departmental stores in its self-managed malls and also subleases retail space to other retailers under its property management segment. CISB’s exposure to market, sublease termination and sublease credit risks are eliminated by AEON’s obligation to meet lease rental payments for the entire AEON Klebang under the terms of the 10-year lease agreement regardless of occupancy level. CISB is, however, exposed to lease termination risk if it fails to meet its legal obligations that relate mainly to property management which are largely confined to insurance and quit rent payments. MARC regards lease termination risk as low given CISB’s limited obligations under the lease agreement.

AEON’s credit profile is supported by its established track record of operating malls in Malaysia; it currently has 27 malls, including a newly opened mall in Kuching, Sarawak in April 2018. AEON recorded a higher occupancy level of around 90% while revenue grew by 4.4% y-o-y to RM2.2 billion in 1H2018. Its property management segment continued to generate a strong operating profit margin of about 31.5% in 1H2018 and contributed about RM107.4 million or 91.6% of the group’s operating profit of RM117.3 million (1H2017: RM110.3 million). The return on its retail segment, however, remains marginal as reflected by an operating profit margin of about 1.3% in 1H2018 (1H2017: 0.7%).

As of 1H2018, AEON’s leverage remained relatively flat with a debt-to-equity (DE) ratio of 0.44 times (2017: 0.48 times). Total borrowings reduced slightly to RM892.1 million from RM937.7 million at end-2017. However, the group’s expansion and mall refurbishment plans may limit further meaningful improvement in its leverage position over the near to medium term. Nonetheless, mall expansion has slowed to one mall per year, a strategy that has been adopted to manage its funding requirement. For 2019, AEON is targeting to open a mall in Negeri Sembilan by end-1Q2019.

AEON’s lease rental payments to CISB are fixed at RM18.3 million for the first five years and subsequently raised to RM18.7 million for the remaining period of the 10-year lease agreement ending 2026. As at end-June 2018, CISB’s designated account balances stood at about RM20.5 million, which is more than sufficient to meet the upcoming RM10.0 million principal redemption in November 2018. MARC also takes comfort from the restriction of dividend payments by CISB if the debt service cover ratio (DSCR) falls below 1.75 times post-dividend distribution.

Major Rating Factors

Strength

• Lease rentals from creditworthy principal tenant AEON Co (M) Berhad.

Challenge/Risk

• Lack of track record in building maintenance operations.