MARC has affirmed its AAIS rating with a stable outlook on Diversified Venue Sdn Bhd’s (DVSB) RM200 million Sukuk Al-Ijarah Master Programme. The rating affirmation is premised on the credit strength of UEM Group Berhad (UEM) which provides liquidity support to the sale-and-leaseback transaction undertaken by DVSB and First Impact Sdn Bhd (FISB), a wholly-owned subsidiary of UEM. In addition, UEM has provided an unconditional and irrevocable agreement to purchase the beneficial interest in the Mercu UEM building from DVSB at a later date. MARC maintains a public information senior unsecured rating of AA on UEM based on the group’s strong business and financial profile as well as its favourable financial flexibility stemming from its status as a wholly-owned entity of Khazanah Nasional Berhad (Khazanah), the government’s investment holding company. The rating is moderated by the cyclicality of UEM’s key businesses, namely the construction and property sectors, and the weaker prospects for dividend flow from expressway operations following the recent debt-funded corporate exercise involving its expressway division.

DVSB is a special purpose vehicle which was set-up to purchase the beneficial interest in the Mercu UEM building from its parent FISB. The purchase was financed by the proceeds raised from the sukuk issue. DVSB concurrently leased the building to FISB for a period corresponding to the tenure of the programme. Located at KL Sentral, Kuala Lumpur, the Mercu UEM building, which has a net lettable area of 246,806 sq ft, serves as the corporate headquarters of the UEM group. The building is currently 74% occupied with a tenancy term of three years with an average rental rate of RM7.00 per square foot. As the lessee, FISB is responsible for making lease rental payments to meet the profit payments on the sukuk. MARC notes that FISB’s prompt payment of lease obligations continues to support timely payment of DVSB’s quarterly profit payments. The redemption of RM20.0 million due on December 28, 2011 has been met and subsequent redemptions are due in September and December 2013 of RM60.0 million and RM120.0 million respectively. 

At the holding company level, MARC notes that UEM derives the bulk of its income from dividends up-streamed from its subsidiaries and associate companies which are mainly involved in four major businesses, namely expressways, engineering and construction, township and property development, and asset and facility management. Its expressway division, headed by PLUS Expressways Berhad (PLUS), has been the major dividend contributor to the group, accounting for 76% or RM336.9 million of total dividends up-streamed of RM443.5 million for financial year ended December 31, 2010 (FY2010). For nine months ended September 30, 2011, dividend income from PLUS stood at RM288.8 million, or 84% of RM345.5 million. 

MARC notes that UEM has recently completed a corporate exercise of setting up a special purpose vehicle, PLUS Malaysia Sdn Bhd (PMSB) to privatise PLUS. Given that the exercise is funded by debt issuance, PMSB, in which UEM and Employees Provident Fund (EPF) have a 51% and 49% stake respectively, will need to service its debt obligations and therefore will not be able to upstream dividends until 2015. However, MARC notes that UEM will receive net proceeds of approximately RM5.9 billion from the exercise which would provide sufficient buffer to meet any near-term financial obligations.

At the holding company level, the company has no debt aside from RM1,022 million owing to subsidiaries as at September 30, 2011. This mainly relates to a US$270 million foreign term loan due in FY2014 undertaken through a wholly-owned subsidiary, UEM Dana (L) Limited. On a consolidated basis, UEM group’s performance has been characterised by divestments (Pharmaniaga Berhad, Teras Teknologi Sdn Bhd and Touch ‘n Go Sdn Bhd), acquisitions (Sunrise Berhad), and a weaker performance of its engineering and construction division. However, the group’s property division, spearheaded by UEM Land Holdings Bhd (ULHB), has improved its earnings prospects with the rapid pace of development in Iskandar Malaysia where it continues to retain a sizeable land bank. In addition, the acquisition of property developer Sunrise Berhad has broadened the group’s property development activities, both geographically and by property types. 

For financial year ended December 31, 2010 (FY2010), group pre-tax profit declined to RM1,649 million (FY2009: RM1,844 million), mainly as a result of impairment losses for overseas projects at its engineering and construction division. Nonetheless, the outstanding order book of RM3.2 billion as at June 30, 2011 (June 2010: RM3.7 billion) provides near-term earnings visibility for the division. UEM group’s gearing position stood marginally higher at 1.20 times (FY2009: 1.18 times) as of FY2010; however, a significant RM12.1 billion (82%) of its total borrowings of RM14.7 billion (FY2009: 82%) were related to concession assets. The debt-to-equity ratio is expected to drop to 0.2 times following the PLUS exercise.

The stable rating outlook reflects MARC’s expectation that UEM will maintain its business and financial profile in line with the current rating. 

Contacts:
Darrell Lim, +603-2082 2261/ darrell@marc.com.my;
Thian Chow Di, +603-2082 2280/ chowdi@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.