CREDIT ANALYSIS REPORT

TROPICANA CORPORATION BERHAD - 2021

Report ID 605389014 Popularity 1004 views 130 downloads 
Report Date Jul 2021 Product  
Company / Issuer Tropicana Corporation Bhd Sector Property
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Rationale
Rating action     
MARC has assigned a rating of AIS to Tropicana Corporation Berhad’s (Tropicana) RM2.0 billion existing Perpetual Sukuk programme with a stable outlook. The Perpetual Sukuk is rated one notch lower than Tropicana’s corporate credit rating of A+/stable to reflect its features and is in line with MARC’s methodology on subordinated instruments. No equity credit has been given to the Perpetual Sukuk issuance as it ranks pari passu with the senior obligations.

As at end-June 2021, the outstanding of the Perpetual Sukuk programme stood at RM248 million. The company expects to issue up to an additional amount of RM330 million from the Perpetual Sukuk programme by 3Q2021, proceeds of which will be mainly used to refinance Tropicana’s existing borrowings and working capital requirement.

Rationale     
Tropicana’s established position in the domestic property industry and its moderate financial risks remain key rating drivers. The tough property market conditions have continued to weigh on the group’s sales performance and remain a key moderating factor of the rating.

At end-March 2021, the group has an ongoing gross development value (GDV) of RM3.9 billion with the majority of its projects located in the Klang Valley. It achieved an overall take-up rate of 58.1% for its ongoing projects. The group’s large unbilled sales of about RM1.1 billion provides earnings visibility through 2023. Of its launches in 2020, the low-density Tropicana Miyu project comprising serviced apartments (GDV: RM261.0 million) recorded an above average take-up rate while two phases under the existing Tropicana Metropark project consisting of serviced apartments (GDV: RM298.6 million) and shoplots (GDV: RM137.2 million) have fared poorly in part due to the movement control order (MCO) being implemented soon after its launch date. The rating agency views with concern the increase in the group’s inventory level to RM300 million at end-March 2021 and a further potential increase in inventory build-up over the near term. The group’s inventory level could worsen if it proceeds with its plans to launch projects worth about RM2.8 billion in GDV over the next few years, about 34% of which is in Johor, if the property market continues to remain lacklustre.

For 1Q2021, Tropicana recorded y-o-y increase in revenue and operating profit to RM240.5 million and RM54.0 million (1Q2020: RM142.7 million; RM26.9 million), attributable to higher progress billings, supported by the relaxation of the MCO during the period. Cash flow from operations (CFO) remains negative at RM47.1 million (full year 2020: negative RM552.7 million). The imposition of stricter restrictions in the Klang Valley since, however, could reverse earnings improvement over the near term.
As at end-March 2021, borrowings stood at RM3.7 billion including the outstanding under the Perpetual Sukuk with the adjusted debt-to-equity (DE) ratio standing at 0.71x. Over the near term, the group’s leverage position could increase to about 0.74x to fund its property development cost. Nonetheless, the group maintains a healthy liquidity position. Tropicana plans to dispose some of its investment properties to shore up liquidity and reduce its reliance on borrowings. The group’s financial flexibility stems from its unutilised credit lines of about RM585 million and cash balance of RM383 million as at end-March 2021, sufficient to cover short-term repayments of RM206 million. Its RM1.3 billion worth of unencumbered landbank offers a source for liquidity.

Rating outlook     
The stable outlook assumes expectations that Tropicana’s credit metrics will remain broadly in line at the current levels in the near term.

Rating trajectory

Upside scenario     
Any upside in the rating and/or outlook would consider a substantial and sustained improvement in the leverage position to below 0.5x, an improvement in the performance metrics including a reduction in the inventory level.

Downside scenario     
The rating could come under pressure if the leverage position was to increase beyond the projected level of 0.75x and/or if the group undertakes debt-funded acquisitions including land banking activities without immediate and meaningful earnings accretion.

Key strengths
Established track record in domestic property development 
Healthy liquidity position

Key risks
Build-up in inventory level
Challenging property market conditions 



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