Rating action     
MARC Ratings has affirmed its AA_IS /AA ratings on funding vehicle OSK Rated Bond Sdn Bhd’s (OSKRB) Sukuk Murabahah/Multi-Currency Medium-Term Notes (Sukuk/MCMTN) Programmes with a combined limit of up to RM2.0 billion. The ratings outlook is stable. The ratings apply only to ringgit-denominated sukuk/notes under the programmes. The programmes carry an unconditional and irrevocable guarantee from OSK Holdings Berhad (OSK). Total outstanding under the rated programmes stood at RM698.0 million as at September 22, 2022.     

Rationale     
OSK’s well-established operational track record, low leverage position and strong financial flexibility remain key rating drivers. For 1Q2022, the group recorded lower y-o-y revenue and pre-tax profit of RM306.5 million and RM98.6 million (1Q2021: RM325.0 million; RM127.7 million) on lower contribution from its property development division due in part to its new launches being in the early stages of the billing cycle. OSK’s combined gross development value (GDV) of ongoing development projects stood at RM2.0 billion with an overall take-up rate of 79.6% as at end-June 2022. Among its key projects are You City III in Cheras (GDV: RM489 million) and Mira @ Shorea Park in Puchong (GDV: RM364 million), as well as two townships, Iringan Bayu in Seremban and Bandar Puteri Jaya in Sungai Petani.     

MARC Ratings notes unbilled sales of about RM1.0 billion provide earnings visibility through 2024. Unsold completed inventory remained minimal at RM10.0 million for its domestic developments. Its overseas project Melbourne Square, in which it holds a 40.6% stake, has achieved around 80% take-up rate for its Phase 1 while subsequent phases are in the planning stages.     

Its financial services segment — lending through its capital financing division and banking through its 10.21% stake in RHB Bank Berhad — has been fairly resilient. For 1Q2022, this segment generated pre-tax profit of RM68.5 million (1Q2021: RM71.0 million). Total financing portfolio stood at RM932.7 million with non-performing loans of 3.7% as at end-June 2022 (end-2021: 5.2%). As the loans carry an average 3.5x collateral cover, OSK deems the recoverability to be strong. Its other businesses — property investment, construction, and manufacturing and sales of power cables and industrialised building system (IBS) — provide relatively moderate earning streams.     

Group borrowings stood at RM2.7 billion as of end-March 2022 (end-2021: RM2.8 billion), with gross debt-to-equity (DE) and net DE ratios of 0.48x and 0.34x. Excluding funding for capital financing, borrowings would stand at RM2.0 billion, translating to adjusted gross and net DE ratios of 0.37x and 0.23x.     

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

Rating trajectory     

Upside scenario     
Any upgrade would consider sustained improvement in profitability although this could pose some challenges 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.