MARC has affirmed its AAA(bg) and MARC-1(bg) ratings on property developer Mega Palm Sdn Bhd’s Bank Guaranteed Medium-Term Notes (BG MTN) of up to RM70.0 million and Bank Guaranteed Commercial Papers (BG CP) of up to RM80.0 million, respectively. The outlook for the ratings is stable. The rating action is underpinned by MARC’s affirmation of its AAA/MARC-1 public information ratings on Malayan Banking Berhad (Maybank) which has unconditionally and irrevocably guaranteed the Medium-Term Notes and commercial papers. Maybank’s current ratings reflect its leading market position in Malaysia as the country’s largest bank, its sound asset quality, its resilient core earnings and its restored capital strength.  

Mega Palm, an indirect 100%-owned subsidiary of upmarket property developer Country Heights Holdings Berhad (CHHB), is developing a 196-acre low-density freehold residential project located along Jalan Damansara, comprising mainly of bungalows and high-end condominiums known as Country Heights Damansara, with an estimated gross development value (GDV) of RM978.2 million. Since the onset of the economic crisis in 2008, housing sales have been stagnant, with the company selling only two bungalow lots between March 31, 2008 and April 30, 2009. As of this date, the project has achieved total sales value of RM546.8 million or 55.9 % of expected GDV (March 31, 2008: RM538.7 million).

Mega Palm deferred a condominium project valued at RM188.1 million which was originally targeted for launch in mid-2009 to 2010. The company has had to replace its significantly reduced housing sales with land sales to meet its operational as well as debt service requirements. For financial year ending December 31, 2008 (FY2008), Mega Palm sold two land parcels: a 7-acre site earmarked for a condominium project for RM36.6 million or at RM120 psf; and a 3.2-acre site earmarked for commercial development for RM21.6 million or at RM155 psf. 

Despite the challenging environment, Mega Palm’s revenue rose more than two-fold to RM72.4 million in FY2008 (FY2007: RM30.8 million) owing to the land sales. Pre-tax profit more than doubled to RM19 million (FY2007: RM9.1 million). Excluding the gain on the sale of land, the company would have registered revenue and a pre-tax loss of RM14.2 million and RM39.2 million respectively. In the same period, its debt-to-equity ratio improved significantly to 0.96 times (FY2007: 1.83 times) on the back of BG CP repayment amounting to RM48.0 million. In line with the higher pre-tax profit, Mega Palm’s CFO rose to RM50.5 million (FY2007: RM16.0 million) in FY2008.

A new access road linking Country Heights Damansara to Lebuhraya Damansara Puchong (LDP) is currently under construction. The estimated RM4.2 million cost of constructing the toll booths and access road as well as a fixed sum of RM3.34 million to be contributed by Mega Palm to highway concessionaire, Lingkaran Trans Kota Sdn Bhd (LITRAK), for its operation and maintenance of the toll booths will be funded through the BG CP proceeds. Mega Palm has obtained the approval of bondholders via a circular resolution on May 19, 2009 to vary the purpose of the BG CP proceeds.

The ability of the new access road which is expected to be completed by end-2009 to stimulate sales of the remaining bungalow lots remains to be seen. Meanwhile, the uncertain timing of a recovery in housing sales and Mega Palm’s significant single-project concentration risk continues to weigh on the stand alone credit profile of the property developer.
 
Contacts:
Rajan Paramesran, 03-2090 2233/ rajan@marc.com.my;
Elea Nor Zainal, 03-2090 2263/ elea@marc.com.my;
Katherine Hee, 03-2090 2273/ hcmay@marc.com.my