MARC Ratings has affirmed its AA_IS rating on Fortune Premiere Sdn Bhd’s RM3.0 billion Multi-Currency Islamic Medium-Term Notes Programme (Sukuk Murabahah). Concurrently, the rating agency has revised the rating outlook to stable from negative. Fortune Premiere is a funding vehicle of IOI Properties Group Berhad (IOI Properties) which has provided an unconditional and irrevocable guarantee on the programme.

IOI Properties’ established market position as a township developer and track record in domestic property development, its low land costs that afford high operating profit margins for its domestic projects, and strong cash flow generating ability remain key factors for the rating affirmation.

The outlook revision to stable reflects the easing of concerns on IOI Properties’ increased borrowing levels to largely fund the acquisition of a 0.78-ha land parcel in Singapore in 2021. Located adjacent to its IOI Central Boulevard Towers office development in the Central Business District (CBD), the land parcel — earmarked for a mixed development project, Marina View — was acquired for SGD1.5 billion (about RM4.68 billion). Borrowings rose from RM11.0 billion to RM16.8 billion, of which its two Singapore projects accounted for 72% as at end-June 2022.

MARC Ratings views the impending completion in 2H2023 of the IOI Central Boulevard Towers development — comprising two towers of 16 and 48 storeys with a net lettable area of 1.28 million sq ft of Grade A office space — will boost the group’s recurring rental income by about SGD120 million p.a. that would ease its debt protection metrics and provide it with the ability to refinance associated construction borrowings to a longer-term maturity. As at date, IOI Properties has already secured about 30% tenancy for the development, for which the rental prospects remain strong given the tight supply of Grade A office space in the CBD area. For its Marina View development, the group has plans to launch the residential component with a gross development value (GDV) of about SGD2.6 billion in 2H2023, proceeds from which will address this project’s associated borrowings.

The rating agency does not expect group borrowings to increase nor decline sharply in the near term with consolidated gross and net debt-to-equity (DE) ratios of about 0.8x and 0.7x as at end-September 2022 decreasing to about 0.7x and 0.6x only in 2024 through organic equity growth. Notwithstanding this, a faster pace of recovery of economic activities in Xiamen, China, as pandemic-induced closures are lifted could lead to the resumption of stalled launches for its IOI PIP development’s remaining residential units amounting to about RM500 million and accelerate the clearance of remaining inventories for its China projects. Of its inventory level of about RM3.0 billion, its Xiamen projects accounted for about 43% as at end-June 2022; its domestic inventory which declined by about RM200 million y-o-y accounted for the balance. While the group does not incur much holding costs as its domestic projects generally have reached breakeven levels, inventory sales would strengthen cash flow. For FY2023-FY2024, consolidated cash flow from operations (CFO) — driven by property sales and rental income from investment properties — is projected to range between RM1.2 billion and RM1.5 billion p.a., translating to an adjusted CFO interest cover of above 3.0x. 

For financial year ending June 30, 2022 (FY2022), consolidated revenue and operating profit grew 4.1% and 10.6% y-o-y to RM2.6 billion and RM868.6 million, supported by rental income from domestic malls and the recently completed IOI Palm City Mall in Xiamen. Future performance will be supported by unbilled sales of about RM605 million and ongoing projects which carry a GDV of RM1.5 billion with an average take-up rate of 66%. It also launched four projects within its existing townships that have a combined GDV of RM300 million during FY2022. Cash balance of RM2.5 billion as at end-1QFY2023 reflects its strong liquidity position.

The stable outlook is based on our expectations that the group will broadly maintain its business and financial performance over the next 12 months.

We do not envisage an upgrade over the next 12 months.  

The rating could come under pressure if financial performance weakens below expectations due to tough property market conditions and/or economic uncertainties or if its borrowing levels increases sharply to negatively impact financial metrics.