FORTUNE PREMIERE SDN BHD - 2018

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

Fortune Premiere is a wholly-owned funding vehicle of IOI Properties Group Berhad (IOI Properties) which has provided an unconditional and irrevocable corporate guarantee on the rated sukuk. As such, the rating reflects the credit strength of IOI Properties, driven primarily by its established brand name and healthy track record in property development, characterised by strong operating margins. Nonetheless, the rating agency observes that IOI Properties’ increased leverage position arising from a recent debt-funded land acquisition in Singapore leaves limited headroom for further weakening in its leverage ratios.

For financial year ended June 30, 2018 (FY2018), IOI Properties had fewer domestic launches which had a gross development value (GDV) of about RM645 million of a planned RM1.3 billion. The projects launched were within the group’s existing townships. During the period, the group sold 2,128 property units and generated cash flow from operations (CFO) of RM1.5 billion. For ongoing domestic projects, IOI Properties’ average take-up rate stood higher at 47% as at end FY2018 (end-FY2017: 40%) as the group continued to work on clearing inventory.

MARC notes there were also no major launches for the group’s foreign projects in Xiamen, China and Singapore during the period. The group’s IOI Palm City project in Xiamen has received full take-up for the first three phases (GDV: RM1.1 billion) while in Singapore, following the completion of its residential project Trilinq (GDV: RM3.1 billion), the group is currently focused on its Central Boulevard office development.

IOI Properties is developing Central Boulevard on its own following the termination of a proposed joint-venture arrangement with a Hong Kong-based property developer. The arrangement would have reduced the group’s debt-to-equity (DE) ratio to about 0.31x from its current DE ratio of 0.65x as at end-June 2018. The elevated DE ratio is a result of borrowings incurred to fund the acquisition of the 2.96-acre Central Boulevard project site for SGD2.57 billion (about RM7.77 billion). As at end-FY2018, consolidated borrowings stood at RM11.9 billion.

The group had refinanced the short-term borrowings incurred on the land purchase to longer-term maturities through Singapore dollar borrowings, which has led to a healthier debt maturity profile. The Central Boulevard site is located within the central business district (CBD) and will be developed into two office towers with a total net lettable area (NLA) of 1.3 million sq ft. Commercial buildings within the CBD continue to record high occupancy and rental rates, underpinned by tight office supply.

For FY2018, revenue was lower by 33% y-o-y at RM2.8 billion, while adjusted operating profit which excluded fair value and foreign exchange gains declined by 33% y-o-y to RM859.7 million. This was mainly due to lower contributions from Singapore and China, attributable to fewer launches. Earnings from the group’s malls showed strong growth during the period, driven by higher occupancy and positive rental reversions. Nonetheless, the group’s adjusted operating margins remained at 31% after taking into account a contraction in property development margins due to higher sales from lower-priced offerings.

CFO was strong during the period, leading to an improvement in cash flow protection measures with CFO interest coverage of 5.0x as at end-June 2018. IOI Properties’ ability to meet its financial obligations is also supported by its good liquidity with cash holdings of about RM2.7 billion at end-FY2018 and broad access to capital markets and bank funding.

The stable outlook assumes that the group will maintain financial metrics that are broadly in line with the rating band.

Major Rating Factors

Strengths

• Major developer of several townships in Malaysia;
• Stable cash flows from property investments; and
• Favourable debt maturity profile.

Challenges/Risks

• Slowdown in the domestic property sector; and
• Increased debt-to-equity ratio.