CREDIT ANALYSIS REPORT

OSK RATED BOND SDN BHD - 2021

Report ID 60538900395 Popularity 76 views 9 downloads 
Report Date Nov 2021 Product  
Company / Issuer OSK Rated Bond Sdn Bhd Sector Industrial Products
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Rationale
Rating action     
MARC has affirmed its AAIS/AA ratings on OSK Rated Bond Sdn Bhd’s (OSKRB) Sukuk Murabahah/Multi-Currency Medium-Term Notes Programme (Sukuk/MCMTN) with a combined limit of up to RM2.0 billion. The ratings outlook is stable. The affirmed ratings apply to ringgit-denominated sukuk/notes issued under the programme. OSKRB is wholly owned by OSK Holdings Berhad (OSK) and was set up as special purpose funding vehicle to undertake the Sukuk/MCMTN programme for which the parent has extended an unconditional and irrevocable guarantee. Accordingly, MARC has equalised the ratings of the programme to OSK’s long-term corporate credit rating. 

Rationale     
OSK’s long-term corporate credit rating of AA is mainly premised on the group’s well-established operational track record in two key businesses – property development and financial services – that provide reliable earnings streams, and on the group’s low leverage position that stems from relatively stable and moderate borrowing levels. OSK’s strong financial flexibility in the form of its 10.15% stake in RHB Bank Berhad is also a rating consideration; the equity stake continues to provide a substantial dividend income stream. 

During the review period, we note that the performance of OSK’s property development segment has been relatively less impacted by the COVID-19 pandemic with revenue declining by a modest 7.0% y-o-y to RM664.5 million in 2020. However, pre-tax profit was higher by 14.4% y-o-y to RM228.7 million due to settlement of residential units from its overseas project, Melbourne Square with a gross development value (GDV) of AUD889.2 million. For 1H2021, performance of this segment rebounded y-o-y to revenue and pre-tax profit of RM378.8 million and RM99.5 million. The better performance is attributable to the group’s staggered pace of launches and locations that have enabled it to chalk up a take-up rate of 77% for ongoing projects. These include projects at townships Bandar Puteri Jaya in Sungai Petani and Iringan Bayu in Seremban as well as serviced apartments projects You City III and Ryan & Miho in the Klang Valley. With an ongoing GDV of RM2.2 billion and unbilled sales of RM705 million, this segment provides earnings visibility over the medium term. Domestically, it has very low inventory of unsold completed units at RM13.7 million as at end-March 2021. 

OSK has one overseas project in Melbourne, Australia through a joint venture in which it has a 40.6% stake; phase 1 of this project, Melbourne Square, was completed in January 2021 and has achieved a 71% take-up rate as at end-June 2021. The project’s retail podium was sold in May 2021 for AUD70.0 million. A remaining 310 units out of 1054 residential units valued at AUD209.4 million as at end-June 2021 remain unsold with demand expected to rebound as pandemic concerns ease. We understand that the group has put on hold the development of future phases of this project.

Its financial services registered steady performance, with pre-tax profit of RM233.6 million in 2020 and RM151.3 million in 1H2021. The profitability mainly stems from credit lending activities through its capital financing segment and share of profits from RHB. Its lending portfolio rose to RM959.3 million by end-March 2021; lending is on a relatively short- to medium-term basis with tenures ranging from 2 to 48 months while the portfolio has a weighted average interest rate of about 9% p.a. We understand that lending is well collateralised, at 3.6x of the loan portfolio (largely quoted shares and properties), while non-performing loans (NPL) remained low, at 1.9% as at end-2020. Aside from property development and financial services, OSK has other businesses – property investment, construction, and manufacturing and sales of power cables and industrialised building system (IBS) – but these provide modest income streams. Its hospitality segment, however, has been significantly impacted by measures implemented to combat the pandemic, leading to pre-tax losses of RM40.7 million in 2020, which narrowed to RM10.5 million in 1H2021. Overall, group revenue and pre-tax profit rebounded to RM592.2 million and RM247.1 million during this period (1H2020: RM430.3 million; RM159.7 million). We expect a sustained improvement in the full year performance, with the boost coming from the property and financing businesses. 

Group borrowings rose by 8.5% y-o-y to RM2.6 billion with a gross debt-to-equity (DE) ratio of 0.48x at end-June 2021. Excluding funding for capital financing, the group’s borrowings would stand at RM1.8 billion, translating to adjusted gross and net DE ratios of 0.35x and 0.21x. At the holding company level, OSK derived dividend income of RM238.9 million in 2020 (2019: RM278.3 million), the bulk of which was contributed by RHB. At the holding company level, borrowings have been low at around RM231.3 million at end-2020. 

Rating outlook     
The stable outlook assumes OSK would broadly maintain its performance and credit metrics in line with expectations. 

Rating trajectory

Upside scenario     
No upgrade is envisaged over the next 12 months. Over a longer term, any upgrade would consider sustained improvement in profitability although this could pose some challenge given the inherent variability of its core property development business and therefore financial performance. This consideration will also be guided by sharp improvement in cash flow metrics and group leverage to about 0.3x.

Downside scenario     
The rating could come under pressure if performance were to deteriorate sharply from expectations and/or if leverage were to increase sharply on higher borrowings to fund activities that may not be earnings accretive in the near term.

Key strengths
Steady income stream from key subsidiaries to holding company OSK
Low group leverage position 
Low inventory level for domestic property projects

Key risks
Challenging property market conditions
Potential credit risk from capital financing activities


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