|Date Article||2020-10-12 00:00:00|
MARC has assigned a preliminary rating of A+IS to Sunsuria Berhad’s proposed RM500.0 million Sukuk Wakalah Programme. The rating outlook is stable.
Sunsuria is a mid-size property developer whose main development is the 375-acre Sunsuria City township in Salak Tinggi, Selangor. Sunsuria remains focused on property development projects within the Klang Valley over the near term.
The assigned rating is premised on Sunsuria’s moderate business and financial risk, underpinned by low leverage and a healthy liquidity position. The rating is constrained by the impact from challenging market conditions on domestic property demand which will likely be worsened by the current economic conditions. The stable outlook assumes that Sunsuria will maintain its balanced approach to property development and manage its financial profile within expectations, in particular its debt metrics with a projected leverage of below 0.5x post initial issuance.
Sunsuria’s profitability is mainly derived from its Sunsuria City development, which was launched in 2015 and still has an estimated gross development value (GDV) of about RM6.3 billion. It is earmarked to be completed by end-2032. Developed with Xiamen University Malaysia as the centrepiece of the township with good connectivity provided by the Express Rail Link and surrounding highways, Sunsuria City’s phases have generally received above average response; however, it recorded low take-up rates for recent launches, including for units in the Monet Garden development which is targeted at foreigners, following a change in regulations on foreign property ownership. Its Forum II development in Setia Alam, Selangor, comprising high-rise residential and commercial development, has also recorded a slower take-up rate save for its SOHO units, reflecting the prevailing weak property market sentiment.
MARC views that the subdued response would lead to an inventory build-up within the next one to three years upon completion of the group’s ongoing developments, which would weigh on its working capital. As at end-June 2020, its inventory level stood at a low RM32.2 million. Given its strong property margins, owing to low property development costs, the group has the wherewithal to reduce its selling prices to support sales, which would help prevent a substantial inventory build-up.
As at end-June 2020, the group has a net GDV of RM1.6 billion for ongoing developments, 47% of which is within Sunsuria City. Over the near term, new developments in Bangsar (high-rise residential units) and Lorong Tuanku Abdul Rahman (retail and office units), in which Sunsuria will acquire a 51% effective equity interest in each, will be its main focus. Their matured locations and proximity to the city centre will mitigate market risks. The proposed acquisitions totalling about RM100 million will be funded by part proceeds from the initial issuance under the proposed sukuk programme.
Operating profit margin for the past five years remained healthy at an average of about 34%, attributable to its ability to manage developments internally, including construction works and material procurement. Operating profit before interest and tax (OPBIT) interest coverage has remained strong at 5.0x. Going forward, the group’s operating profit is expected to be supported by unbilled sales of RM462.0 million as at end-June 2020 (9MFY2020). Group borrowings stood at a low RM255.2 million, providing a gross debt-to-equity (DE) ratio of 0.25x. Its cash flow from operations (CFO), which stood at RM114.5 million as at end-June 2020, could moderate over the medium term on the back of staggered project launches and a lower average take-up rate. Its healthy cash balance of RM254.9 million, coupled with unutilised credit facilities of RM131.7 million would support its construction requirement needs over the next 12 months.
Major Rating Factors
• Stable financial performance;
• Strong profit margin relative to peers; and
• Low leverage position.
• Challenging domestic property market outlook; and
• Potential increase in inventory level.