MARC Ratings has downgraded its rating on YNH Property Berhad’s (YNH) Islamic Medium-Term Notes Programme (Sukuk Wakalah) to A_IS. Concurrently, the rating outlook has been revised to negative from stable. As at end-October 2023, the total outstanding amount stood at RM323.0 million under the RM700 million Sukuk Wakalah programme.

The rating actions reflect MARC Ratings’ increased concerns about YNH’s ability to generate sufficient cash flow to meet its financial obligations due to its weak business profile, characterised by modest launches and slower-than-expected asset monetisation.

During the financial year ended June 30, 2023 (18 months), YNH’s group borrowings rose to RM1.3 billion from RM1.1 billion as at end-December 2021. Last year, YNH had indicated that its high borrowings would be addressed through the divestment of a 5.1-acre land parcel and from the securitisation of its retail properties, 163 Retail Park shopping centre in Mont Kiara and AEON Seri Manjung in Perak. The group expects to mainly use the RM592.5 million proceeds from the asset monetisation exercise to pare down its borrowings, bringing down its leverage position to 0.78x from 1.48x. 

MARC Ratings notes that the asset monetisation exercise has been delayed and YNH now expects the transactions to only be completed by 1Q2024. The rating agency also notes that Bursa Malaysia Securities Berhad has recently raised queries regarding past transactions on the 5.1-acre land parcel. YNH’s auditors have also qualified the financial accounts for FY2023 on these related matters. To address these concerns, YNH has appointed two independent parties to review the transactions and complete the reports by 1Q2024.

YNH’s business profile has weakened given that it only has a few ongoing projects to generate meaningful cash flow. As at end-October 2023, its main project, Solasta Dutamas, a high-rise residential development in Mont Kiara with a gross development value (GDV) of RM720 million, achieved a take-up rate of about 50%. Its other key project is the Manjung township in Perak which has 700 acres of land remaining for development. Developed in phases, this project provides a modest revenue stream. 

For 18MFY2023, YNH generated revenue of RM307.5 million with pre-tax profit of RM20.4 million, impacted by higher operating and finance costs. For comparison purposes, group revenue and pre-tax profit for the 12-month period ended December 2022 declined by 8.9% and 34.7% y-o-y to RM210.7 and RM22.6 million. Cash flow from operations (CFO) of RM47.9 million remained modest, leading to weak cash flow metrics.

The negative outlook incorporates MARC Ratings’ opinion that YNH would face challenges in improving its business prospects over the near term given its current limited financial flexibility. The rating could be downgraded if the asset monetisation is not concluded as planned, worsening YNH’s liquidity position vis-à-vis meeting financial obligations on its elevated borrowings.

The negative outlook considers the group’s ongoing challenging prospects and the reliance on timely asset sales to meet financial obligations.

No immediate upside given the group’s weak business and financial profile.

The rating would be further lowered if there is no meaningful improvement in the group’s business operations and reduction in borrowings to a level where the cash flow would provide sufficient buffer to service financial obligations.