UEM SUNRISE BERHAD - 2018

MARC has affirmed its ratings of MARC-1_IS /AA-_IS on UEM Sunrise Berhad’s 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 programmes each has a programme limit of RM2.0 billion with a sublimit of RM500.0 million on the ICP issuances.

The ratings affirmation incorporates UEM Sunrise’s longstanding track record in property development with sizeable unbilled sales, its moderate leverage position and its diversified property projects across types and geographies that mitigate concentration risks. UEM Sunrise’s long-term ratings also factors in a one-notch rating uplift for parental support from UEM Group Berhad, a government-related entity with strong and diversified business and financial profile. MARC considers UEM Sunrise as strategic subsidiary of UEM Group. These ratings are moderated mainly by the challenging environment for the domestic property projects and the potential risk to the group’s future projects in Australia if property slowdown in that country is prolonged.

The stable rating outlook incorporates MARC’s expectations that UEM Sunrise’s standalone credit profile would remain commensurate with its current rating band. The ratings and outlook could be revised if parental support from UEM Group is assessed as weakening and/or if any material changes affect the status or credit profile of the parent.

During the review period, UEM Sunrise has focused on standalone developments in Mont Kiara, Klang Valley, increasing its presence in the area with two new launches, namely Residensi Solaris Parq (gross development value (GDV): RM764.5 million) and Residensi Astrea (GDV: RM323 million) with take-up rates of 70% and 51% as at end-November 2018. In Iskandar Puteri, Johor, UEM Sunrise has had no major launches, focusing on clearing inventories, particularly for its Almas, Estuari Gardens and Melia Residences projects. The group’s combined take-up rate for its Johor projects stood at 88% at end-November 2018. The group had launched projects with a total GDV of RM740.2 million up to end-November 2018.

UEM Sunrise’s Melbourne projects have progressed as per schedule. In 3Q2018, the group completed its first delivery of 120 residences and four office units for the Aurora Melbourne Central development (GDV:RM2,389.6 million), with a further 70 units expected to be handed over the near term. For the first delivery, the group achieved a settlement rate of 92%, which has alleviated concern over buyers pulling out. For the Conservatory project (GDV:RM990.6 million), it commenced delivery of units in December 2018. Full delivery on both developments is expected to be completed by end-2019. The group’s third project in Melbourne, Mayfair (GDV: RM1,132 million) a luxury high-rise development which was launched in 3Q2017 had a take-up rate of 41% as at end-September 2018. MARC notes that this development could be exposed to demand risk, especially in the context of tighter lending regulations in Australia.

UEM Sunrise’s outstanding contracted sales of RM4.7 billion as at end-September 2018 offers strong earnings visibility over the medium term. For 9M2018, UEM Sunrise recorded higher profitability of 65% y-o-y to RM260.8 million, supported by the first delivery of Aurora units and higher contribution from land sales which typically deliver high margins due to the low cost its of land bank. Operating profit before interest, tax, depreciation and amortisation (OPBITDA) coverage over finance costs stood healthy at 5.9x, slightly higher than 5.8x as at end-December 2017. Its full-year 2018 results are expected to come in stronger with the expected delivery of Aurora and Conservatory units in 4Q2018 as well as the completion of pending land sale transactions.

The group’s gearing stood marginally higher as at end-September 2018 at 0.64x (end-December 2017: 0.58x) mainly attributable to borrowings incurred for the final stages of the group’s Melbourne projects. As at end-September 2018, UEM Sunrise had short-term maturing debt of RM2.8 billion including RM700 million under its ICP/IMTN-1 programme due in December 2018. The group had in October 2018, issued RM700 million IMTN under ICP/IMTN-2 which will be used to redeem the maturing payment under ICP/IMTN-1. In addition, about RM1.0 billion of short-term debt relating to loans on Aurora and Conservatory will be paid through proceeds from the progressive delivery of units on the two projects in 2019. The group estimates gearing to fall to below 0.40x by end-FY2019.

Major Rating Factors

Strengths

• Property arm of UEM Group Berhad, a government-linked entity;
• Significant track record in property development;
• Sizeable land bank; and
• Geographic diversification of property projects.

Challenges/Risks

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