MARC has resolved its MARCWatch Developing placements of Sunrise Berhad's (Sunrise) and Horizon Hills Development Sdn Bhd's (Horizon Hills) respective debt ratings upon the former becoming a wholly-owned subsidiary of UEM Land Holdings Berhad (ULHB). Horizon Hills is a 50:50 joint venture between ULHB’s wholly-owned subsidiary UEM Land Berhad (UEM Land) and Gamuda Berhad (Gamuda).

The ratings that were removed from MARCWatch and affirmed with a stable outlook are as follows:

Sunrise: Long-term A+ID rating on its RM400 million Islamic Medium Term Notes Programme; and

Horizon Hills: Short-term MARC-1ID(S) rating on its RM70 million Islamic Commercial Paper Programme.

The ratings were first placed under review in November 2010 following ULHB's conditional takeover bid in order for MARC to assess the impact of the proposed acquisition on the credit profiles of Sunrise and UEM Land. UEM Land provides credit support for Horizon Hills' RM70 million Islamic Commercial Paper Programme in proportion to its shareholding, along with joint venture partner Gamuda.

The current rating actions were driven by the following considerations:

MARC sees no immediate rating impact to Sunrise's standalone credit profile arising from the change in its ownership. Sunrise continues to be rated on a standalone basis pending meaningful integration of its operations with that of ULHB. The decision to align Sunrise's rating with ULHB's or otherwise will be driven largely by the strategic importance of Sunrise to ULHB, the degree of operational integration and the respective intrinsic credit strength of both entities.

MARC believes that the key benefit of the ownership change to Sunrise is that the medium and long-term sustainability of its business profile would improve with access to ULHB’s sizeable landbank and upon becoming a component entity of UEM Group, a government-linked company.

MARC has affirmed Sunrise's rating on the expectation of sustained earnings and cash flow generation for the next two years based on its future expected billings from contracted sales on hand (unbilled sales) and planned new launches. The affirmed rating also incorporates its satisfactory liquidity position relative to its short-term borrowings and the absence of any large near-term debt maturities.

Sunrise's earnings have held up in spite of the deferment of some planned launches. Sunrise recorded declines in its revenue and pre-tax profit of 26% and 12% respectively for the 12 months to June 30, 2010 (FY2010). It posted flat first quarter earnings for the three months ended September 30, 2010 (1QFY2011). Unbilled sales of RM863.8 million as at September 30, 2010 provides near-term earnings visibility.

As for ULHB, MARC believes that the former's acquisition of Sunrise will have a broadly neutral effect on its credit profile prior to the realisation of any synergy, particularly its leverage. The funding of the acquisition has been accomplished through the equity route by way of issuance of around 262 million new ordinary shares and 837 million redeemable convertible preference shares (RCPS). However, if a meaningful portion of the RCPS is not converted by their maturity date, this could give rise to refinancing risk for ULHB, which would have an obligation to redeem the remaining outstanding RCPS in January 2013 at RM1.00 each.

Although the share swap acquisition of Sunrise will notably dilute UEM Group's ownership in ULHB, UEM Group is expected to retain majority ownership of ULHB. (Between January 19, 2011 and February 9, 2011, some 91.6 million RCPS have been converted into ULHB shares, increasing ULHB’s equity base by RM210.7 million.)

The acquisition of Sunrise is expected to enhance the consolidated business and financial profile of ULHB. The readily apparent benefits of the acquisition include Sunrise's strong franchise as a developer of lifestyle properties, its complementary property development expertise as well as its consistent profitability.

Upon consolidation of Sunrise, the asset base of the enlarged ULHB would increase from RM3.7 billion to RM5.7 billion on a pro-forma basis as at September 30, 2010. ULHB's consolidated results and operating margins will also be boosted by Sunrise's earnings contribution. Sunrise posted a pre-tax profit of RM180.9 million for the 12 months to June 30, 2010 as compared to ULHB's pre-tax profit of RM59.2 million for the nine months to September 30, 2010.

Although MARC expects ULHB's historically low financial leverage to increase upon consolidation of Sunrise, the rating agency is of the view that this poses no additional financial risk.

MARC believes that strong parental support will continue to be provided by the UEM Group going forward. This reduces the sensitivity of MARC's public information rating on ULHB to transitory changes in its financial profile and post-acquisition integration risk.

Contacts:
Nisha Fernandez, +603-2082 2269/ nisha@marc.com.my;
Benjamin Yab, +603-2082 2270/ benjaminyab@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.