View Credit Analysis Report (60577)

SubcategoryIndustrial Products
Date Article2020-08-05 00:00:00
MARC has assigned a final rating of AA-IS to Malaysian Resources Corporation Berhad’s (MRCB) proposed Islamic Medium-Term Notes Programme of up to RM5.0 billion (Sukuk Murabahah) with a stable outlook.

The assigned rating incorporates MRCB’s established market position in property development, particularly in transit-oriented developments (TOD), that has benefitted from the support extended by its key shareholder Employees Provident Fund (EPF) through funding of its various projects. The group’s strategy of employing a pre-let and pre-sell business model to alleviate market risk and its healthy balance sheet support the rating. The rating is mainly moderated by the potentially high working capital requirement for the group’s residential and construction undertakings and the impact on property sales and construction activities from the weak economic growth that is likely to be exacerbated by the COVID-19 pandemic. The stable outlook incorporates MARC’s expectation that MRCB’s financial metrics would remain broadly in line with the rating band.

MRCB is a domestic pioneer of TOD, having made its mark with its maiden project, Kuala Lumpur Sentral CBD that encompasses the city’s main transportation hub, office and residential towers, hotels, a shopping mall and hospitals. Its other developments include Kwasa Sentral, PJ Sentral Garden City, Penang Sentral, Kwasa Sentral and Cyberjaya City Centre. At the same time, Bukit Jalil Sentral is being jointly developed with EPF. It has an ongoing gross development value (GDV) of RM3.1 billion as at end-March 2020, with an average take-up rate of 62.3%. The EPF’s continued support has been evident through its proportionate subscription of MRCB shares worth RM607.9 million under a RM1.7 billion rights issue, the purchase of an 80% stake in the Bukit Jalil Sentral development and its 30% joint-development participation in the Kwasa Sentral project. For both projects, MRCB has been appointed as the management contractor with an estimated combined contract value of RM18.5 billion. The proceeds from EPF’s investments have helped to alleviate funding risk. MRCB’s approach to pre-let and/or pre-sell its developments as well as to undertake strategic partnerships with other institutional investors has mitigated market risk.

MRCB’s construction order book (of external projects) stood at about RM21.9 billion as at end-March 2020. The construction progress of various infrastructure projects such as the Mass Rapid Transit 2 (MRT2) and Light Rail Transit 3 (LRT3) would need to pick up pace following disruptions caused by the COVID-19 pandemic. Towards this end, as the movement restrictions are eased, the number of workers on-site has been increased to carry out the work concurrently to expedite construction progress.

For full year 2019, the group recorded revenue of RM1.3 billion, an 11.1% decline y-o-y on excluding a one-off land sale of RM388.0 million in 2018. This is mainly due to the lower revenue recognition from the group’s key high-rise property development projects as they are still in the early construction phase. Coupled with the deferment of progress billings of the LRT 3 project due to a cost optimisation exercise, pre-tax profit was recorded lower at RM53.0 million. However, in 1Q2020, MRCB’s revenue and operating profit increased y-o-y largely attributable to revenue recognition from the 1060 Carnegie project in Melbourne upon the handover of units as well as higher progress billings from construction segment.

MRCB Group’s borrowings declined sharply to RM1.9 billion at end-March 2020 (2015: RM3.4 billion) chiefly due to its deleveraging exercise that included the disposal of Eastern Dispersal Link Expressway (EDL) for RM1.3 billion and the sale of an 80% stake in the Bukit Jalil Sentral project for RM1.1 billion to the EPF in 2018. The bulk of the proceeds were utilised to pare down its land-related and toll concession debts. At end-March 2020, the group’s debt-to-equity (DE) ratio stood at 0.40x (net DE: 0.29x) but this is projected to rise to about 0.57x in the medium term.

Major Rating Factors

Strong support extended by key shareholder EPF;
Established track record in transit-oriented developments; 
Sizeable ongoing projects provide earnings visibility; and
Moderate leverage position.

Potential increase in inventory level; and
Challenging economic conditions to weigh on sales.

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