MARC has reaffirmed the ratings of OSK Property Holdings Bhd (OSKP)’s Class A and Class B BaIDS at AID and A- ID respectively. The ratings outlook is negative. The ratings reflect OSKP’s satisfactory performance of its development projects, in particular, Bandar Puteri Jaya (BPJ), strong shareholders support, moderate level of cash flow diversification and financial flexibility. However, these factors are tempered by OSKP’s declining profitability measures, negative free cash flow and increasing debt leverage.

The negative outlook reflects delay in some of OSKP’s property projects in Mon’t Jade and Sri Banyan in Kajang which has impacted its profitability measures. Nevertheless, the outlook could be lifted and revised to stable in the near term if OSKP achieves satisfactory progress in its projects to an extent which facilitates improvement in earnings and cash flow measures.

OSKP’s financial profile has been largely driven by its flagship development, BPJ in Sungai Petani, Kedah. Since its first launch in 1999, the take up rate of BPJ has been relatively good at 89% as at August 31, 2007, translating into gross development value of RM550 million from a total of RM640 million. MARC expects BPJ to dominate in terms of cash flow generation relative to its other projects, in light of its current developments and future planned property launches. Meanwhile, OSKP’s other development projects in Seremban, Kajang, Sungai Buloh and other locations will provide future property development revenue. The group has also started to diversify into property investment, through its acquisition of Atria, a shopping mall situated in Damansara Jaya for a total cash consideration of RM75 million. The rental from the shopping mall will be rather insignificant relative to its property development income in the first 2 years, but is projected to record higher cash flows in the remaining years.

Under the issue structure, sales receivables in respect of its BPJ development constitute the main source of repayment for the BaIDS. As at 31 August 2007, OSKP complied all its covenants with a security coverage of 1.69 times, which is well above the covenanted level of 1.43 times.

OSKP’s profitability measures have been declining in the last 3 consecutive years with revenue and operating profit for fiscal year 2006 falling sharply by 6% and 42% respectively against FY2005. Profitability measures deteriorated further with OSKP recording an operating margin of 11.9% for the first 9 months of FY2007 against 17.3% in the previous nine month corresponding period. This was despite a 14% increase in revenue to RM58 million as compared to RM51 million for the previous 9 month period. Delay in launches, higher construction cost and lower sales realized from overhang units were the main reasons behind the drop in margins. MARC considers the profitability measures to be lower than its rated peers. Nevertheless, with a pick up in development activity, OSKP’s earnings are expected to recover in the short to intermediate term.
 
Credit protection measures were weak in FY2006. Funds from operations (FFO) took a dive with FFO coverage ratio stood at mere a 0.01 times as compared to 0.12 times in the previous year. OSKP is expected to continue generating negative free cash flow in the short to intermediate term given its estimated capital expenditure of RM126 million for the next two years. The recent rights issuance exercise amounting to RM100 million and the remaining balance through bank borrowings will cover the funding gap. OSKP’s debt leverage position has exhibited an increasing trend in the last few years to 0.60 times as at September 30, 2007, but remains acceptable for its current ratings. The ratings have assumed a further increase in the group’s debt leverage position arising from its acquisition of Atria mall early 2007.