CREDIT ANALYSIS REPORT

SUNWAY BERHAD & SUNWAY TREASURY SUKUK SDN BHD - 2021

Report ID 60538900400 Popularity 51 views 9 downloads 
Report Date Nov 2021 Product  
Company / Issuer Sunway Treasury Sukuk Sdn Bhd Sector Trading/Services
Price (RM)
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Rationale
Rating action     
MARC has affirmed its MARC-1/AA- ratings on Sunway Berhad’s issuances under the RM2.0 billion Commercial Papers/Medium-Term Notes (CP/MTN) Programmes, and MARC-1IS(cg)/AA-IS(cg) ratings on Sunway Treasury Sukuk Sdn Bhd’s issuances under the RM2.0 billion Sukuk Programme and RM10.0 billion Islamic Commercial Papers/Islamic Medium-Term Notes (ICP/IMTN) Programmes. All ratings carry a stable outlook. Sunway Treasury Sukuk is a funding vehicle for parent Sunway which has provided Al-Kafalah guarantees on the former’s issuances.

Rationale     
Sunway’s well-established market position in key business segments and strong liquidity position remain key rating drivers. Its diversified earnings streams from key businesses have enabled the group to withstand the impact from the COVID-19 pandemic and challenging economic conditions. Its growing healthcare segment will further strengthen its diversified income base. The key moderating factors are the weak domestic property market conditions that will weigh on sales and potentially lead to inventory build-up as well as the uncertain recovery in the retail, leisure and hospitality segments.

The group’s borrowings stood at RM7.3 billion as at end-June 2021, with gross and net debt-to-equity (DE) ratios of 0.71x and 0.57x. We expect Sunway to exercise financial discipline in regard to drawdowns, despite the sizeable limits afforded under the group’s various programmes. We also note that by end-June 2021 (1H2021), the group has reverted to a net current asset position, following a net current liabilities position of RM883.7 million as at end-2020 due to prior year adjustments. 

For 1H2021, property development was the key earnings contributor, recording a pre-tax profit of RM43.6 million or 26.2% of group pre-tax profit of RM166.2 million. Over the near term, profitability will be supported by Sunway’s sizeable unbilled sales of RM3.6 billion. Ongoing projects carried a gross development value (GDV) of RM7.5 billion as at end-June 2021, of which domestic projects in the Klang Valley accounted for 50% and Singapore 43%. It achieved take-up rates of 69.1% in Malaysia and 80.1% in Singapore at end-1H2021. We view that of the two regions, Singapore’s property projects – including the recently launched Parc Central Residences (GDV: RM1.1 billion) and Ki Residences (GDV: RM963 million) – will continue to record better take-up rates given the stronger demand for residential properties in the island state. 

Conversely, its Malaysian property projects could face slower recovery from the impact of the pandemic and property overhang. Its Sunway Belfield (GDV: RM783 million) and Sunway Velocity Tower C (GDV: RM355 million) launched in 1Q2021 and 4Q2020 have received modest response. Against this backdrop, we note that the group could run the risk of a rapid build-up in completed property inventory, which stood at RM445 million as at end-1H2021. Most of the inventory is from its projects in Iskandar. 
 
Sunway’s ongoing construction order book (external projects) of RM2.3 billion as at end-June 2021 – including Light Rail Transit 3 (LRT3) (RM368 million), the TNB HQ Campus development (RM409 million) and two highway projects in Tamil Nadu, India (RM823 million) – provides earnings visibility through 2023. This segment recorded 24.6% y-o-y higher pre-tax profit of RM36.3 million in 1H2021. 

Sunway’s healthcare segment has continued to expand in recent years, leading to stronger contribution to group revenue. During 1H2021, the healthcare segment’s revenue grew 35.3% y-o-y to RM371.2 million with operating profit of RM47.1 million (1H2020: operating loss of RM13.1 million). The improved performance was mainly on the back of higher occupancy of the newly opened Sunway Medical Centre Velocity. Over the next three years, we note that the group has projected to invest RM2 billion in capex in three new hospitals and expand its existing hospitals to increase its bed count to 2,366 from 862 at end-June 2021. We draw comfort from the fact that the proceeds from the group’s divestment of a 16% stake (on a fully converted basis) in its healthcare business to Singapore’s sovereign wealth fund for RM750 million will be mainly used to fund its healthcare expansion, thereby reducing the financial commitment for the group for the segment. 

Its property investment segment has continued to incur losses from the closure of its retail, leisure and hospitality operations. At this juncture, the recovery in the retail, leisure and hospitality sectors is uncertain given the lingering effects from the pandemic. The group’s malls could face occupancy and rental rate pressures as the weak retail outlook would weigh on demand for spaces. Nonetheless, over the near term, the weak performance in this segment will be partly offset by the group’s other performing segments. 

For 1H2021, revenue and pre-tax profit improved y-o-y to RM2.0 billion and RM166.2 million, mainly attributable to higher contribution from the healthcare segment. The group’s borrowings stood lower at RM7.3 billion (2020: RM7.5 billion), but is projected to rise to about RM8.4 billion in the medium term towards capex requirement. With undrawn credit facilities of RM2.4 billion and cash balance of RM1.5 billion, the group has some financial flexibility. 

Rating outlook     
The stable outlook reflects our expectation that Sunway’s credit metrics will remain broadly in line with the current levels in the near term. 

Rating trajectory

Upside scenario     
Any upward movement in the rating and/or outlook is unlikely in the near term. Any upgrade on a longer term would depend on a sustained improvement in the performance metrics in its key businesses, including a reduction in the inventory level and strong earnings generation. We would also consider a sharp improvement in the gross leverage position to below 0.5x. 

Downside scenario     
The ratings could come under pressure if leverage rises sharply from the projected level and/or there is a prolonged weakening in business performance and/or if key businesses incur losses with limited prospects to reverse the negative downtrend. 

Key strengths
Established track record in property and construction businesses 
Strong earnings visibility from unbilled sales 
Growth prospects, and substantial proceeds from part divestment of healthcare business

Key risks
Capex requirement mainly for healthcare business
Potential build-up in property inventory level 
Challenging market conditions for retail, leisure and hospitality segments


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