CREDIT ANALYSIS REPORT

MALAYSIAN RESOURCES CORPORATION BERHAD - 2020

Report ID 60535 Popularity 463 views 31 downloads 
Report Date Jun 2020 Product  
Company / Issuer Malaysian Resources Corporation Bhd Sector Industrial Products
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Rationale
MARC has assigned a preliminary rating of AA-IS to Malaysian Resources Corporation Berhad’s (MRCB) proposed Islamic Medium-Term Notes Programme of up to RM5.0 billion (Sukuk Murabahah) with a stable outlook.

The assigned rating incorporates MRCB’s established market position in property development, particularly in transit-oriented developments (TOD), that has benefitted from the support extended by its key shareholder Employees Provident Fund (EPF) through funding of its various projects. The group’s strategy of employing a pre-let and pre-sell business model to alleviate market risk and its healthy balance sheet support the rating. The rating is mainly moderated by the potentially high working capital requirement for the group’s residential and construction undertakings and the impact on property sales and construction activities from the weak economic growth that is likely to be exacerbated by the COVID-19 pandemic. The stable outlook incorporates MARC’s expectation that MRCB’s financial metrics would remain broadly in line with the rating band.

MRCB is a domestic pioneer of TOD, having made its mark with its maiden project, Kuala Lumpur Sentral CBD that encompasses the city’s main transportation hub, office and residential towers, shopping malls, hospitals and hotels. Its developments include PJ Sentral Garden City, Penang Sentral, Kwasa Sentral and Cyberjaya City Centre. At the same time, Bukit Jalil Sentral is being jointly developed with EPF. It has an ongoing gross development value (GDV) of RM3.3 billion as at end-2019, with an average take-up rate of 63.8%. The EPF’s continued support has been evident through its proportionate subscription of MRCB shares worth RM607.9 million under a RM1.7 billion rights issue, the purchase of an 80% stake in the Bukit Jalil Sentral development and its joint-venture participation in the Kwasa Sentral project. For both projects, MRCB has been appointed as the management contractor with an estimated combined contract value of RM18.5 billion. The proceeds from EPF’s investments have helped to alleviate funding risk. MRCB’s approach to pre-let and/or pre-sell its developments as well as undertake strategic partnerships with other institutional investors has mitigated market risk.

MRCB’s construction order book (of external projects) stood at about RM21.8 billion as at end-2019. The construction progress of various infrastructure projects such as the Mass Rapid Transit 2 (MRT2) and Light Rail Transit 3 (LRT3) would need to pick up pace following disruptions caused by the COVID-19 pandemic. Towards this end, as the lockdown restrictions are eased, the number of workers on-site has been increased to carry out the work concurrently to expedite construction progress.

For 2019, MRCB recorded revenue of RM1.3 billion, an 11.1% decline y-o-y on excluding a one-off land sale of RM388.0 million in 2018. This is mainly due to the lower revenue recognition from the group’s key high-rise property development projects as they are still in the early construction phase. Coupled with the deferment of progress billings of the LRT 3 project due a cost optimisation exercise, pre-tax profit was recorded lower at RM53.0 million.

MRCB Group’s borrowings declined sharply to RM1.8 billion at end-2019 (2015: RM3.4 billion) chiefly due to its deleveraging exercise that included the disposal of Eastern Dispersal Link Expressway (EDL) for RM1.3 billion and the sale of an 80% stake in the Bukit Jalil Sentral project for RM1.1 billion to the EPF in 2018. The bulk of the proceeds were utilised to pare down its land-related and toll concession debts. At end-2019, the group’s debt-to-equity (DE) ratio stood at 0.38x (net DE: 0.27x) but this is projected to rise to about 0.57x in the medium term.

Major Rating Factors

Strengths
Strong support extended by key shareholder EPF;
Established track record in transit-oriented developments; 
Sizeable ongoing projects provide earnings visibility; and
Moderate leverage position.

Challenges/Risks
Potential increase in inventory level; and
Challenging economic conditions to weigh on sales.
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