MARC has affirmed its ratings of MARC-1IS/AA-IS on property developer UEM Sunrise Berhad’s (UEM Sunrise) Islamic Commercial Paper (ICP) Programme and Islamic Medium Term Notes (IMTN) Programme with a combined nominal value of RM2.0 billion and a sub-limit of RM500.0 million on the ICP Programme. The outlook for the ratings is stable. The ratings on UEM Sunrise incorporate a one-notch uplift from its standalone rating on the basis of support extended by its parent UEM Group Berhad (UEM). MARC’s credit assessment of UEM incorporates its status as a government-owned entity arising from its full ownership by Khazanah Nasional Berhad (Khazanah), the Malaysian government’s investment arm and the UEM group’s fairly strong diversified business and credit profiles. 

MARC notes that UEM Sunrise’s standalone profile has benefited from the property demand generated by the completion of catalytic projects and the significant ongoing development activities in Iskandar Malaysia, which has received cumulative investments of about RM128.2 billion as at September 30, 2013. As the master developer of Nusajaya, one of the five development zones in Iskandar Malaysia, UEM Sunrise has steadily increased the number of its property launches in recent years. The total gross development value (GDV) of its ongoing projects rose to RM18.6 billion as at September 30, 2013 (June 30, 2012: RM5.2 billion) with its projects achieving take-up rate of above 80%. Among the group’s major ongoing projects is Teega, a high-end mixed development project in Puteri Harbour which was launched in November 2012 with an estimated GDV of RM1.1 billion. MARC opines that large unbilled sales of RM4.9 billion as at end-June will provide medium-term earnings visibility.

Notwithstanding the strong demand factors in Iskandar Malaysia, UEM Sunrise’s growth momentum could be affected by the tightening regulatory environment for property developers and buyers. MARC also observes that as foreign buyers constituted about 49.0% of UEM Sunrise’s properties in Iskandar as at end-September 2013, any additional restrictive policy on foreign buyers would weigh on demand, although the recent increase in the floor price on property purchased by foreigners to RM1.0 million from RM500,000 is expected to have minimal impact as its properties are generally priced above the RM1.0 million mark. The weakening property market trend is evident in the Klang Valley where response has been mixed for UEM Sunrise’s residential projects and office developments. Nonetheless, MARC notes that these projects in the Klang Valley, along with the ongoing developments in Vancouver Canada, provide some geographic diversification to mitigate concentration risk in Iskandar Malaysia. However, given the size of its undeveloped land bank of about 7,637 acres in Iskandar Malaysia as at end-June 2013, UEM Sunrise will continue to focus on property development activities in the region. 

The group’s major development thrust will be Gerbang Nusajaya, a mixed development covering 4,551 acres with a total estimated GDV of RM38.5 billion. The projects, which have attracted investment interest from abroad, are expected to begin launching in June 2014.
 
For the nine-month period ended September 30, 2013 (3QFY2013), UEM Sunrise’s revenue increased by 51.8% to RM1.9 billion while pre-tax profit rose almost two fold to RM649.1 million (3QFY2012: RM1.2 billion; RM311.4 million) largely due to the completion of land sales in Puteri Harbour to Liberty Bridge Sdn Bhd for RM400.7 million and Southern Marina Development Sdn Bhd for RM182.0 million. The improved performance was also supported by strong sales of the Teega development, which is the first project in Iskandar Malaysia undertaken by wholly-owned subsidiary Sunrise Berhad (Sunrise) after its acquisition by UEM Sunrise in 2011. Sunrise is a significant contributor to the group’s profitability, accounting for 41.4% and 35.5% of total revenue of RM1.94 billion and pre-tax profit of RM535.1 million in FY2012 (FY2011:RM1.7 billion; RM355.2 million) respectively.  

UEM Sunrise’s consolidated borrowings stood at RM1.7 billion with the debt-to-equity ratio remaining at a low 0.28 times as at end-3QFY2013 (FY2012: RM1.5 billion; 0.25 times), well below the debt covenant of 1.0 times. At the holding company level, borrowings comprised the RM600.0 million IMTNs which were issued in 2012. The company issued an additional RM700.0 million under the rated IMTNs in mid-December 2013. MARC observes that the dividend income at the holding company has been inconsistent, registering RM145.1 million, largely from Sunrise, in FY2012 (FY2011: nil). Nonetheless, UEM Sunrise retains financial flexibility from the undrawn portion of RM700 million under the rated programme as at end-December 2013. The first bullet repayment of RM600.0 million IMTNs is due in December 2017.  

The stable rating outlook incorporates MARC’s expectations that UEM Sunrise would be able to sustain its credit metrics that are commensurate with the current rating band in the near to medium term. 

Contacts:
Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my;
Taufiq Kamal, +603-2082 2251/ Taufiq@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.