MARC Ratings has assigned ratings of MARC-1_IS/AA-_IS to UDA Holdings Berhad’s (UDA) Islamic Commercial Papers (ICP) programme of up to RM100.0 million and Islamic Medium-Term Notes (IMTN) programme of up to RM1.0 billion with a combined aggregate limit in nominal value of up to RM1.0 billion (Sukuk Wakalah Programmes) with a stable outlook.

The assigned ratings incorporate UDA’s longstanding track record in property development, its healthy balance sheet characterised by a low leverage position, and recurrent income stream from investment properties. The ratings benefit from a one-notch uplift based on MARC Ratings’ assessment of UDA’s status as a wholly-owned entity of Minister of Finance (Incorporated) (MoF) and its role in property development that is aligned with the Government of Malaysia’s (Government) socioeconomic objectives. UDA comes under the purview of the Ministry of Entrepreneur and Cooperatives Development (MECD) with its board comprising representatives from both the MoF and the MECD, underscoring the importance of its strategic role to the Government. Moderating the ratings are the prevailing challenging property market conditions that have led to an increase in inventories and may impact its financial performance.

Since commencing operations about 50 years ago as a driver of urbanisation, UDA has expanded its role to encompass residential and commercial development in underserved areas in support of the Government’s social policy. In return, we note, the Government has provided grants and soft loans to UDA partly due to the higher risk these projects entail. We also view UDA’s overall business strategy to balance its social-oriented projects with commercial projects as positive given the higher margin from the latter can offset that of the former. We also note that the group has paced its project launches over the years to balance supply and demand, resulting in a moderate gross development value (GDV) standing at RM494.8 million for ongoing projects as at end-September 2022. Of this, 38 Bangsar, a high-end condominium project launched in September 2021 with a GDV of RM256.1 million, and Residensi Akasia Jubilee, a Residensi Wilayah Phase 1 project in Pudu, Kuala Lumpur launched in July 2021 with a GDV of RM148.2 million, accounted for 51.8% and 30.0% of the total GDV of ongoing projects. 

Given the recent launches of its key projects, the average take-up rate has been modest at 37.2%, weighed down mainly by the slower response to 38 Bangsar. Excluding 38 Bangsar, the average take-up rate would be 54.5%. We also note the increase in inventory levels to RM340.4 million as at end-September 2022 (2021: RM292.4 million). About 52.4% of the total inventory value or RM178.2 million is the value of unsold office units in its Legasi Kampung Baru project, of which the prospects are challenging in the near term.

UDA’s investment properties – mainly office buildings and shopping complexes – provide recurring rental income of about RM70.0 million p.a. The average occupancy rate of its commercial properties has been healthy at 87.9% as at end-September 2022, although operating profit has yet to recover to pre-pandemic levels, largely due to delayed reversal of rental waivers and discounts given during the pandemic. As at end-September 2022, operating profit margin rose to 21.1% from 7.1% in 2021 but still less than the 27.4% achieved during pre-pandemic 2019. Its hotel properties which have been affected by low occupancy levels provide modest income. UDA also provides facility management services, among which are building management consultancy and audit services to some major corporations. These services provide stable income of about RM45.0 million p.a.

For 1H2022, group performance rebounded by 83.0% y-o-y in revenue to RM258.6 million. UDA has maintained a healthy balance sheet with a very low leverage position and a gross debt-to-equity (DE) ratio of 0.16x. Total borrowings stood at RM444.5 million which includes a treasury loan of RM165.3 million from the MoF that is expected to be converted into equity by 1Q2023. Based on the proposed initial drawdown of up to RM600.0 million under the rated IMTN programme that will be utilised for landbanking in the Klang Valley and working capital, the increase in borrowings will lead to a DE ratio of about 0.3x. MARC Ratings also notes that UDA has sizeable unencumbered landbank of about 1,014 acres with an estimated market value of about RM2.6 billion which provides a strong source of additional liquidity. 

The stable outlook reflects our expectation that UDA will broadly maintain its credit metrics, supported by a disciplined approach to business operations and the maintaining of its healthy balance sheet structure.

Any upside in the rating and/or outlook will hinge on sustained improvement in earnings generation such that profitability and cash flow metrics show a marked increase from current levels.

The ratings could come under pressure on weaker sales performance and any sharp increase in borrowings beyond projections that will skew its leverage position substantially.