CREDIT ANALYSIS REPORT

SIME DARBY PROPERTY BERHAD - 2021

Report ID 60538900463 Popularity 69 views 15 downloads 
Report Date Dec 2021 Product  
Company / Issuer Sime Darby Property Berhad Sector Property
Price (RM)
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Rationale
Rating action     
MARC has affirmed its AA+IS rating with a stable outlook on Sime Darby Property Berhad's (SD Property) Islamic Medium-Term Notes Programme of RM4.5 billion under the Shariah principle of Musharakah (Sukuk Musharakah Programme).

Rationale     
The key rating drivers are SD Property's well-established position as a township developer and strong sales track record in domestic property development that has continued to provide strong earnings visibility. It has sizeable landbank in key population growth areas as well as a low leverage position. The rating also benefits from a one-notch uplift for implicit support from parent Permodalan Nasional Berhad (PNB), a government-linked investment company. The challenging property market conditions remain a key moderating factor. 

In 1H2021, SD Property launched 20 domestic projects with a combined gross development value (GDV) of about RM1.6 billion. The projects are mainly in its key townships of City of Elmina, Serenia City, Bandar Bukit Raja, and Kuala Lumpur Golf & Country Club (KLGCC). The ongoing projects carry a GDV of RM7.5 billion as at end-October 2021, of which the Klang Valley accounted for 86% and the remaining are located in Negeri Sembilan and Johor. Overall, the group’s ongoing projects achieved a strong average take-up rate of 88%. 

We note that its sales track record remained strong despite domestic property market cycles, largely due to its property mix with a focus on landed residential units priced in the mid-market segment with strong highway connectivity, also with increased diversification into carefully planned high-rise residential (Jendela) and industrial developments. Going forward, profitability will be supported by unbilled sales of RM1.8 billion as at end-June 2021. In 1H2021, the group sold some completed units mainly from the KL East high-rise project amounting to about RM78 million, which led to a slight reduction in inventory level to RM554.1 million. Relative to the scale of its ongoing property development, the completed inventory level remains manageable. The group’s landbank of about 15,199 acres are mostly located in the populous Klang Valley areas, particularly along the Guthrie Corridor Expressway, which offers strong potential for township and industrial developments. 

The prospects for SD Property’s primary overseas project, Battersea Power Station (Battersea), in which it has a 40% equity stake, have improved despite the economic impact of the pandemic. Home prices in the UK have risen in 2021 after five years of decline. This has been partly supported by the stamp duty holiday which ended in September 2021 and demand from house buyers looking for bigger or better space. The project had recorded an impairment of £62.4 million (RM337.1 million) on its work-in-progress and inventories under development in 2020, and we understand there should be no further major impairments in the foreseeable future.

For 1H2021, SD Property recorded y-o-y improvement in revenue and operating profit to RM1.1 billion and RM159.5 million, mainly on the strong sales performance of its ongoing property projects and reduction in inventories. During the period, the group registered cash flow from operations (CFO) of RM95.0 million, translating to a moderate CFO interest coverage of 1.42x. Its borrowings stood slightly higher at RM3.4 billion at end-June 2021, with a low gross and net debt-to-equity (DE) ratios of 0.37x and 0.29x. These borrowings include the outstanding sukuk of RM800 million under the rated programme. Its healthy balance sheet would continue to provide sufficient headroom to support its operational and growth activities in the future. Moving forward, its major commitments comprise funding requirements for industrial and logistics developments and a capital call of about RM663.2 million as at end-June 2021 for its Battersea redevelopment project in London. SD Property has retained strong financial flexibility stemming from significant unutilised financing facilities and sizeable unencumbered landbank.

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

Rating trajectory

Upside scenario     
We do not envisage an upgrade over the next 12 months. Any upgrade would consider sustained improvement in SD Property’s performance metrics, including strong sales performance of ongoing developments and a further reduction in the inventory level. These considerations will also be guided by a sharp improvement in cash flow metrics while maintaining its healthy balance sheet. 

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

Key strengths
Well-established market position in township development
Good sales track record particularly in the mid-range property segment
Low group leverage position and strong financial flexibility

Key risk
Challenging domestic property market conditions


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